Nexus among herding behavior, ESG disclosure, and market capitalization in the Egyptian stock market

Abstract

Purpose: This study aims to investigate the impact of herding behavior on environmental, social, governance (ESG) disclosure among firms listed on the Egyptian stock exchange, with the moderating role of market capitalization.

Design/methodology/approach: The sample consists of 37 Egyptian firms within the EGX70 index covering the period between 2019 and 2023. The analysis employs a panel data analysis using a Fixed Effects Model. ESG disclosure was measured using the ESG index, while herding behavior was measured by stock return dispersion, and market capitalization was measured by multiplying the number of shares outstanding by price.

Research Limitation/Implication: This study is limited to the context of Egypt and the data sample, with further limitations including a small sample size and the influence of COVID-19 during the time period used. However, this study contributes to the growing literature on ESG and investigates the behavioral drivers of disclosure specifically in the Egyptian stock market.

Findings: Results reveal that herding behavior has a positive but insignificant relationship with ESG disclosure. The study further investigates the moderating role of market capitalization, which has a positive but insignificant relationship, and has two control variables, with firm size showing a significant positive relationship, while financial leverage shows an insignificant positive relationship with the ESG disclosure. Overall, while some firms may imitate other firms in disclosing ESG practices, herding behavior is not the dominant force for ESG disclosure in Egypt.

Theoretical implications: The study combined stakeholder theory and behavioral finance to provide evidence that internal and regulatory mechanisms overwhelm herding forces in emerging economies. The research resists typical market imitation thought by placing emphasis on institutional structure and firm-specific resources.

Originality/value: This study has valuable insights for investors, regulators, and corporate directors by highlighting the limited impact of market imitation and emphasizing the importance of internal company characteristics in ESG disclosure. Moreover, the study suggests that a more robust regulatory framework must be in place and that more awareness initiatives should be implemented to promote better ESG disclosure across the Egyptian financial market.