Chapter 2

Literature Review

2.1 Introduction

This research critically examines the share value of prominent

Egyptian firms, with a focus on comparing companies engaged in
diverse international markets to those primarily oriented toward
the domestic Egyptian market. Understanding this distinction is
crucial, as the interplay between local and global market
dynamics can significantly influence share performance ( Dawood et
al., 2021). The study aims to assess whether financial performance
mediates the relationship between macroeconomic variables and
share value, while also investigating the delayed (lagged) effects
these macroeconomic factors may impose.

Additionally, this study investigates whether the Egyptian stock

market effectively reflects the fair value of listed companies. This
inquiry is essential for evaluating market efficiency and
determining the extent to which share prices capture the
underlying economic fundamentals of firms (Billmeier and Massa, 2007).
A key contribution of this research lies in its comparative analysis
of fair value versus market value within the Egyptian context. This
approach provides a clearer understanding of valuation
discrepancies and contributes to a more nuanced interpretation of
investor behavior and market dynamics (Al-Wazier, 2024).

The analysis is positioned within the broader context of the

Egyptian stock market, which is subject to the influence of
multiple macroeconomic variables (Ayyad, 2023). By identifying firm-
level financial strengths, this research outlines strategic
responses that may reduce the vulnerability of firms to adverse
macroeconomic fluctuations. Moreover, it advances the academic
discourse on stock market performance by clarifying the
relationship between macroeconomic dynamics and share
valuation.
The examination includes multiple sectors within the Egyptian
stock market, with emphasis on well-established firms engaged in
both domestic and international operations. This dual focus
facilitates a comparative analysis between firms operating across
diverse markets and those primarily concentrated within Egypt.
Such an approach enables a more comprehensive understanding
of how different market orientations respond to macroeconomic
pressures (Elazhary, 2024).

Existing literature emphasizes the relevance of share valuation in

connection with key macroeconomic indicators, including
currency fluctuations, inflation rates, GDP growth, and interest
rates—each exerting measurable effects on share value within the
Egyptian context. Prior studies have specifically identified a
negative relationship between inflation and the earnings quality
of Egyptian firms, demonstrating that inflation tends to reduce
profitability and, by extension, depress share prices ( Ayyad, 2023).

The Economic Value-Added (EVA) technique for corporate

valuation has been critically examined, particularly during periods
of economic expansion, where its limitations in accurately
reflecting firm performance under inflationary conditions have
become apparent. A comprehensive understanding of corporate
value requires careful consideration of the firm’s operational
industry and its seasonal business dynamics ( Zdeněk, 2011).

According to H.M. van der Poll et al. (2011), the selection of appropriate
performance measures is strongly influenced by the unique
characteristics of an organization, indicating that the EVA method
may not be suitable for all business contexts. Their findings
underscore the importance of understanding the broader business
environment when determining which financial metrics to apply.
Accurate calculation of the Weighted Average Cost of Capital
(WACC), as well as the identification of required adjustments to
the EVA framework, depends on close engagement with
management to gather informed insights into the company’s
operations.

Recent studies predominantly report a negative correlation

between inflation rates and share values, suggesting that rising
inflation generally leads to declining share prices ( Eldomiaty et al.,
2018). However, this study offers a more refined perspective by
incorporating the time-lagged effects inherent in these
relationships.

Boons et al. (2019) report that preliminary findings reveal a positive

correlation between inflation rates and market value following a
specific time delay. This finding underscores the complex
dynamics through which inflationary fluctuations influence market
valuation over time. For instance, although initial spikes in
inflation can generate uncertainty and result in declining share
values, subsequent adjustments in market sentiment may lead to
a recovery—demonstrating the intricate timing associated with
macroeconomic effects.

Thus, while prevailing research indicates a negative correlation

between inflation rates and share values, evidence of a positive
correlation emerging over time underscores the importance of
incorporating temporal effects into economic analysis. The
influence of macroeconomic factors is seldom immediate and
frequently varies in magnitude and direction across time,
highlighting the need for a more comprehensive understanding of
these dynamic relationships (Antonakakis, 2016).

Furthermore, this study investigates the moderating effect of

financial performance on the relationship between
macroeconomic factors—such as inflation, GDP growth, and
currency depreciation—and firm value, while accounting for the
time lags through which these macroeconomic variables exert
their influence.
Suseno (2020) emphasizes that stronger corporate financial
performance can mitigate the negative impacts of inflation and
currency depreciation while enhancing the positive effects of GDP
growth. This underscores the importance of effective financial
strategies in addressing macroeconomic challenges. By
examining how financial performance interacts with these
macroeconomic variables, this research provides deeper insights
into the mechanisms influencing share value and contributes to
the broader literature on financial analysis and market behavior.

The theoretical framework of this research is founded on the

intersection of macroeconomic theory, corporate finance
principles, and valuation methodologies. It establishes a
structured basis for analyzing the extent to which external
economic conditions influence firm value across different time
horizons.

Drawing on macroeconomic principles, this study assumes that

variables such as inflation, GDP growth, and exchange rate
fluctuations exert significant—though often delayed—effects on
firm performance and market valuation (Ahmed, 2025). These
delayed effects, or time lags, are supported by adaptive
expectations theory and market adjustment models, which posit
that financial markets and corporate operations adjust gradually
to economic shocks due to informational inefficiencies, regulatory
constraints, and behavioral dynamics.

In parallel, Mousanezhad et al. (2020) analyze firm-level valuation using

corporate finance models—particularly the Free Cash Flow to Firm
(FCFF) and Free Cash Flow to Equity (FCFE) approaches—which
estimate intrinsic fair value based on expected future
performance. This framework incorporates the moderating role of
financial health, grounded in contingency theory, and posits that
firms with stronger liquidity, profitability, and solvency metrics
are better equipped to absorb or defer the adverse effects of
macroeconomic changes.
This theoretical model facilitates a multi-dimensional analysis that
captures not only the direct and lagged effects of economic
factors but also how internal financial structures mediate these
relationships across different sectors within the Egyptian market
Figure-1.

Figure: 1 the schematic for research methodology for the

proposed study.

1. Research Objectives

The objectives key categories are:

1. Specific Conditions and Scenarios: This category will

focus on identifying and delineating the specific conditions
and scenarios under which macroeconomic threats manifest
in corporate share value, particularly for firms targeting
international versus local markets.

2. Sector Resilience: This part will examine whether certain

sectors are more affected by macroeconomic factors than
others, identifying which sectors exhibit the highest
resilience against macroeconomic volatility.
 3. Market Value and Fair Value Assessment: Finally, this
section will investigate whether the Egyptian market value
aligns with fair value assessments, exploring the accuracy
and efficiency of market pricing in reflecting underlying
economic fundamentals.

By addressing these objectives, the research aims to provide a

comprehensive understanding of the interactions between
macroeconomic factors, sector performance, and share value in
the Egyptian context. This examination will enhance our grasp of
the complex dynamics governing stock market behavior and
support informed investment decisions and strategic planning
within the Egyptian market.

2.2 Research Variables

Understanding the key research variables—macroeconomic

factors, stock value, and financial performance metrics—is
essential for grasping the foundational elements of this study.
This section aims to provide a comprehensive discussion of these
variables, elucidating their individual significance and
interconnections. By thoroughly examining these components, we
prepare ourselves to explore how they relate to one another in
the subsequent section, "II. Relationship with Stock Market
Value." (Shamma, 2024)

M. Sakr et al. (2022) highlight that each variable serves as a building

block for understanding the dynamics at play in the Egyptian
market. First, macroeconomic factors such as GDP, inflation rates,
and currency depreciation set the broader economic context in
which firms operate. Recognizing how these factors influence
overall economic health is crucial for interpreting stock
performance.

Next, the concept of stock value—encompassing market value

and fair value—provides insight into how companies are
perceived by investors and how their true worth can be assessed.
Understanding these valuation methods is key to analyzing
market behavior and investor sentiment (He, 2023).

Finally, financial performance metrics, including liquidity and

profitability ratios, offer a lens through which to evaluate a firm's
internal health and operational efficiency (Kuttu, 2024). These
metrics help investors discern how well a company can withstand
economic pressures and capitalize on opportunities.

May Mahmoud Elewa (2022) emphasizes that a crucial aspect of

assessing financial health is the Z-score, which combines various
financial ratios to predict a firm's risk of bankruptcy and overall
stability. This study strives to confirm the significance of using
Altman Z-Score models to maintain the availability of accurate
information related to company business health in Egypt. By
employing these models, stakeholders can make informed
decisions based on a comprehensive understanding of a firm's
financial condition and potential risks.

In my view, understanding the interaction between

macroeconomic factors, stock value, and financial performance is
essential for explaining firm dynamics in Egypt. Macroeconomic
shifts set the external stage, while stock value—through both
market and fair measures—reflects how firms are perceived
versus their intrinsic worth. Yet, it is financial performance that
reveals the firm’s true resilience. I believe the Z-score, by
integrating liquidity, profitability, and leverage, provides the most
practical lens for assessing stability, making it a valuable tool for
linking external shocks with internal strength.

The structure of this section is as follows:

2.2.1 Macroeconomic Factors: This portion will cover

essential variables, including GDP, inflation rates, and
currency depreciation (EGP depreciation), outlining their
significance and impact on stock value.
 2.2.2 Stock Value: Here, the concepts of market value and
fair value will be examined, with fair value assessed using
methodologies such as Free Cash Flow to Firm (FCFF), Free
Cash Flow to Equity (FCFE), and Economic Value Added
(EVA).

2.2.3 Financial Performance: This segment will delve into

financial performance metrics, including liquidity ratios
(current, quick, and cash ratios) and profitability ratios
(return on invested capital and profit margin). Additionally,
the Z-score will be calculated using three methods: Altman,
Kida, and Sherrod, specifically tailored for Egyptian
companies.

By establishing a thorough understanding of these research

variables, we can effectively transition into the next section,
which will analyze the relationships between these factors and
their collective impact on stock market behavior. This structured
approach ensures that we appreciate the foundational elements
before exploring their interconnections, ultimately enhancing our
comprehension of the complexities within the Egyptian financial
landscape.

2.2.1 Macroeconomic Factors

Macroeconomic factors are vital indicators that influence the

overall economic environment in which firms operate ( Pacini, 2017).
This portion will cover essential variables, including:

A. Gross Domestic Product (GDP): GDP represents the total

economic output of a country and serves as a primary indicator
of economic health (H. McCulla & Smith, 2015). A growing GDP
typically correlates with increased consumer spending and
investment, which can lead to higher corporate earnings and,
consequently, elevated stock prices (Ayyad, 2023). In the Egyptian
context, fluctuations in GDP growth can significantly impact
investor sentiment and market performance.
B. Inflation Rates: According to Höflmayr (2022), understanding
inflation dynamics necessitates comprehending the underlying
concept and its measurement. Inflation is characterized as a
process in which prices consistently rise while purchasing
power declines. Essentially, this means there is a widespread
and sustained increase in the prices of goods and services over
an extended period. High inflation can adversely affect profit
margins, as firms may struggle to pass increased costs onto
consumers (Eldomiaty et al., 2018).

Sjövall (2023) notes that rising inflation often prompts central banks
to raise nominal interest rates to curb inflationary pressures. This,
in turn, elevates borrowing costs, potentially dampening
investment and economic growth, which can negatively impact
stock market valuations.

C. Currency Depreciation (EGP Depreciation): Ca’ Zorzi et al

(2007) define currency depreciation as a decrease in a nation’s
currency value within a floating exchange rate system,
resulting in the domestic currency purchasing less foreign
currency. This makes imports more costly while boosting the
competitiveness of exports. Factors contributing to currency
depreciation include:

 Economic fundamentals: Such as low GDP growth, high

inflation, or rising unemployment, which can erode investor
confidence and reduce demand for the domestic currency
(Thomas, 1994).

 Interest rate differentials: Lower domestic interest rates

compared to those in other countries can lead to capital
outflows. Bruno et al. (2018) observed that when the interest rate
gap between emerging markets and developed economies
narrows, capital tends to flow out of the emerging markets.
This outflow reduces demand for the local currency of
 developed countries, contributing to currency depreciation as
investors seek higher returns abroad.

 Political instability: Uncertainty can deter foreign

investment. It deters foreign investment. When investors
perceive a country as politically unstable, they often withdraw
their capital or hesitate to invest, leading to reduced demand
for the domestic currency (Maraoui et al, 2021).

Currency depreciation affects firms differently, particularly those

with international operations. A weaker Egyptian Pound can
enhance the competitiveness of exports but may also increase
the costs of imports, impacting profit margins for companies
reliant on foreign goods (Dawood et al., 2021). Understanding the dual
effects of currency fluctuations is essential for assessing their
overall impact on stock value.

These macroeconomic factors collectively shape the investment

landscape and influence investor behavior, making them critical
variables in the analysis of stock value.

2.2.2 Stock Value

Nissim and Penman (2008) mention that The stock value segment will
explore the concepts of market value and fair value, which are
fundamental to assessing a company's worth.

A. Market Value: Market value is determined by the current

trading price of a company's shares in the stock market. It
reflects the collective perception of investors regarding a firm's
future earning potential and risk profile. Market value can be
influenced by macroeconomic conditions, investor sentiment,
and sector-specific trends (Abd Almegied and Sobhy, 2015).
B. Fair Value: Nissim and Penman (2008) uses the Fair value as
represents an estimate of a company's intrinsic worth based on
its financial fundamentals. Various methodologies are used to
calculate fair value, including:
 Free Cash Flow to Firm (FCFF): This method estimates the
cash flow generated by a firm's operations before accounting
for debt payments. It is particularly useful for valuing firms with
significant leverage, as it provides a clearer picture of cash
generation (Vrbka & Vitková, 2021). Unlike equity-based valuation
measures, FCFF provides a capital-structure-neutral
perspective, making it particularly useful for valuing firms with
varying leverage levels (Miranda, 2024).
FCFF originates from the discounted cash flow (DCF)
framework, which asserts that a firm's value is determined by
its ability to generate future cash flows (Brealey, Myers, & Allen, 2020).
Berk et al. (2019) emphasize that FCFF is particularly advantageous
in leveraged settings because it isolates operational
performance from financing distortions.
A key advantage of FCFF, as noted by Vrbka and Vitková (2021), is its
compatibility with the Weighted Average Cost of Capital
(WACC), ensuring that the discount rate matches the cash
flow's claimholders. Despite its widespread use, FCFF is not
without limitations. Scholars caution that its accuracy heavily
depends on the reliability of input assumptions, particularly for
long-term CapEx and working capital projections ( Damodaran, 2012).
Koller et al. (2020) further note that FCFF can overstate value in
cyclical industries where reinvestment needs are volatile.
Moreover, the metric's indifference to capital structure may
obscure financing risks in highly leveraged firms ( Brealey et al.,
2020).
 Free Cash Flow to Equity (FCFE): Free Cash Flow to Equity
(FCFE) is a critical financial metric that measures the residual
cash available to equity shareholders after accounting for
operating expenses, interest payments, debt repayments, and
necessary reinvestments in the business (Damodaran, 2012).
Unlike accounting profits, FCFE reflects the actual cash that can
be distributed as dividends or used for share buybacks without
compromising future growth. This makes it a more reliable
indicator of a firm’s ability to generate shareholder value,
particularly in capital-intensive industries where earnings may
be distorted by non-cash adjustments (Alawneh and Daraghma, 2020).
By focusing on cash flows rather than accrual-based earnings,
FCFE provides a clearer picture of a company’s financial health
and its capacity to reward investors sustainably.
The importance of FCFE extends to equity valuation, where it
serves as the foundation for the discounted cash flow (DCF)
model, enabling investors to estimate a firm’s intrinsic worth
(Koller et al., 2020). Companies with consistently high FCFE are
often viewed favorably, as they demonstrate the ability to fund
growth internally while still returning capital to shareholders.
For instance, Apple’s substantial FCFE in recent years has
allowed it to execute large-scale share repurchases and
maintain robust dividend payouts, reinforcing investor
confidence (Apple, 2023).
Conversely, according to the European Central Bank (2022), firms with
negative or volatile FCFE may signal financial strain or
aggressive reinvestment strategies, requiring deeper scrutiny
of their long-term sustainability. Despite its advantages, FCFE
has limitations, including sensitivity to capital structure
decisions and short-term fluctuations in working capital or
capital expenditures. A firm can artificially inflate FCFE by
increasing debt, which may not be sustainable in the long run
(Alawneh and Daraghma, 2020).
Additionally, FCFE may vary significantly across industries,
making cross-sector comparisons less meaningful ( Victoria et al,
2012). Nevertheless, when analyzed alongside other financial
metrics, FCFE remains an indispensable tool for assessing
shareholder value, guiding investment decisions, and
evaluating corporate financial strategies. Its role in
distinguishing between accounting profits and real cash returns
underscores its relevance in both academic research and
practical investment analysis.
Literature often contrasts FCFF with FCFE to highlight their
distinct applications. While FCFF is preferred for leveraged firms
and acquisitions, FCFE is more suitable for stable, low-debt
companies where equity cash flows are the primary focus ( Berk et
al., 2019). This dichotomy underscores the importance of selecting
the appropriate cash flow measure based on valuation context
and capital structure considerations (Penman, 2013).

 Economic Value Added (EVA): EVA calculates a firm's

financial performance by deducting the cost of capital from its
operating profit. This methodology helps identify whether a
company is generating value beyond its cost of capital, making
it a valuable tool for performance assessment ( Stewart, 1991, as cited
in Fabozzi, 2004). EVA represents a significant advancement in
value-based management by focusing on economics rather
than accounting profits. Recent scholarship has expanded our
understanding of EVA's applications and limitations in modern
financial analysis (Sabol and Sverer, 2017).
Modern applications, as demonstrated by Fernández (2019), show
that EVA provides a more accurate measure of true economic
profit than traditional accounting metrics by explicitly
considering the opportunity cost of invested capital.
Mostafa (2021) examines a range of macroeconomic indicators—
including Economic Value Added (EVA), revenue, EBITDA
(earnings before interest, taxes, depreciation, and
amortization), return on equity (ROE), earnings per share (EPS),
and the natural logarithm of changes in EPS. Among these, EVA
emerges as the most influential factor, underscoring its critical
role in evaluating corporate performance. The study also notes
that the S&P 500 industry is categorized into seven distinct
sectors, with EVA’s impact primarily driven by factors such as
capital cost optimization, profitability growth, effective asset
and capital utilization, and improvements in operational
efficiency.
 Liu and Wang (2017) mentions EVA's focus on economic profit rather
than accounting profit helps mitigate earnings management
concerns, as noted in a cross-country study.
While Economic Value Added (EVA) is a useful metric, relying
on it exclusively to assess market reactions has limitations.
Accurate asset evaluation requires incorporating fair value
assessments to provide a more comprehensive picture.
Managers often use EVA to guide investment decisions, which
can significantly affect cash flow. However, in high-growth
companies, substantial investments and associated cash
outflows can distort EVA in short-term analyses. This
underscores the need for complementary evaluation methods
to achieve a more accurate assessment of performance ( Tortella
& Brusco, 2003).
Additionally, the metric's reliance on accounting adjustments
introduces subjectivity, potentially compromising comparability
across firms. These findings echo earlier concerns raised by
Zenzerović. (2023) about EVA's implementation challenges in
practice.

This study evaluates three valuation methods FCFF, FCFE, and

EVA. each offering distinct advantages. FCFF provides a capital-
structure-neutral view of firm value, while FCFE focuses on cash
available to equity holders. Both are effective for assessing
financial health, though their reliability depends on accurate long-
term forecasts of reinvestment needs and financing decisions. By
employing multi-year averaging and conservative assumptions,
this study mitigates their sensitivity to short-term volatility.

EVA, in contrast, measures economic profit by deducting the cost

of capital from operating earnings. While insightful for mature
firms, EVA can underrepresent value in high-growth companies,
where negative EVA may reflect strategic investments rather than
poor performance. Additionally, EVA’s accounting adjustments
(e.g., R&D capitalization) introduce implementation variability,
reducing cross-firm comparability.

Given this study’s focus on long-term valuation, FCFF and FCFE

are preferred for their stability and alignment with cash flow-
based valuation principles. However, EVA could supplement this
analysis by assessing interim value creation, particularly for firms
with stable capital structures.

While both FCFF and FCFE are derived from the discounted cash
flow (DCF) framework, they serve different purposes. FCFF
reflects cash generated by a firm’s operations before debt
payments, making it ideal for valuing firms regardless of capital
structure. In contrast, FCFE focuses on the cash available to
equity holders after debt obligations, offering a direct view of
shareholder returns. FCFF suits scenarios with high leverage or
acquisitions, while FCFE is more relevant for stable, low-debt firms
where equity cash flows are the primary concern.

Examining both market value and fair value enables a

comprehensive understanding of how external perceptions and
internal financial health interact to influence stock valuations.

2.2.3 Financial Performance

Financial performance metrics serve as critical indicators for

assessing a company's operational efficiency, profitability, and
financial health (Kuttu, 2024). These metrics provide stakeholders
with quantifiable measures to evaluate a firm's ability to generate
returns, manage risks, and sustain operations.

A. Liquidity Ratios: Liquidity ratios evaluate a company's

capacity to meet short-term financial obligations, reflecting its
working capital management effectiveness (Sulastri et al., 2024). The
analysis will focus on:
 Current Ratio: Calculated as current assets divided by current
liabilities, this ratio measures short-term solvency and is a key
 component of liquidity ratios. While a ratio above 1.0 suggests
adequate coverage of short-term obligations, industry
benchmarks vary significantly (Halim, 2024).
 Quick Ratio: Also known as the acid-test ratio. It is a liquidity
indicator that evaluates whether a company has enough short-
term assets to cover its current liabilities. The reasoning for
this is that inventory may sell slowly and might not be readily
converted to cash. Furthermore, if there were a need for a
quick sale of inventory, it would probably be sold at a
considerable discount relative to its value on the balance sheet
(Aniyah et al, 2020)
 Cash Ratio: This ratio evaluates a company's liquidity by
comparing cash and cash equivalents to current liabilities. As
the most conservative of the liquidity ratios, it assesses a firm's
ability to meet short-term obligations using only its most liquid
assets, excluding less immediate resources such as receivables
or inventory (Pazarceviren et al, 2015).
B. Profitability Ratios: are critical financial metrics that
measure a company's capacity to generate earnings relative to
its revenue, assets, and equity. These ratios serve as
fundamental indicators of operational efficiency and value
creation, providing stakeholders with essential insights into a
firm's economy (Pazarceviren et al, 2015). Time-Series Analysis:
Minimum 3–5-year horizons needed to assess true profitability
(K and T Laitinen, 2018). performance Key profitability ratios include:
 Revenue-Based Profitability Metrics
Evaluate how effectively firms turn sales into profit. reveal the
share of revenue retained after expenses, reflecting
operational efficiency. It offering insight into a company’s
financial strength and market competitiveness (Soliman, 2007).
 Gross Profit Margin: Measures the percentage of revenue
remaining after direct production costs (COGS). Research
demonstrates its particular importance in manufacturing
 sectors (Gulo and Sembiring, 2024), where a minimum 30% margin
typically indicates competitive advantage (ZHANG, 2024).
 Operating Margin: It reflects operational efficiency after
accounting for all operating expenses (Park, 2017). Studies show
persistent operating margin differences explain approximately
40% of cross-firm valuation variations (Harrington et al, 2022).
 Net Profit Margin: A financial metric that reflects the
percentage of revenue that remains as profit after all expenses
have been deducted, including operating costs, interest, taxes,
and other expenditures. It serves as an indicator of a
company’s overall profitability and efficiency in managing its
costs relative to its total revenue (SAMSUNG Business Report, 2023).

A higher net profit margin suggests that the company is effective

at converting sales into actual profit, while a lower margin may
point to issues such as high operating expenses or weak pricing
strategies. This ratio is particularly useful for comparing
profitability across companies or industries, as it accounts for the
complete cost structure rather than just gross or operating
income (Jayathilaka, 2020).

 Capital Efficiency Metrics

assess how effectively firms utilize invested capital to generate
returns, providing insight into value creation and long-term
sustainability (Puspitasari et al, 2023).
 Return on Assets (ROA): a financial performance indicator
that measures how efficiently a company uses its assets to
generate profit. It reflects the company’s ability to convert its
investments in assets—such as equipment, inventory, or
property—into net income. A higher ROA indicates that the
company is effectively managing its resources to produce
earnings, suggesting strong operational efficiency. Conversely,
a low ROA may imply that assets are underutilized or that the
business is not generating sufficient returns relative to its asset
base (Nurpratiwi et al, 2022).
 ROA is particularly useful for comparing performance across
companies with similar asset structures, helping investors and
analysts assess how well a firm is leveraging its assets to drive
profitability (Supriyadi and Terbuka, 2021).
 Return on Invested Capital (ROIC): ROIC is a profitability
metric that assesses how effectively a company generates
returns from the capital invested by both equity and debt
holders. Measures return on the capital invested in the
business, typically excluding cash and non-operating assets.
Focuses more on the return from core operations, considering
long-term debt and equity only (Mauboussin, 2022).
Key difference: ROIC is more precise for assessing the
performance of a company’s operational investments, while
ROA gives a broader look at overall asset efficiency.
 Return on Capital Employed (ROCE): financial ratio that
measures a company’s profitability and efficiency in using its
total capital base to generate operating profits. It focuses on
the return generated from all long-term capital employed in the
business, including both equity and debt, excluding short-term
liabilities. ROCE is particularly valuable when comparing
companies with significant capital investment, as it reveals how
effectively a firm is using its available resources to drive
earnings before interest and taxes. A higher ROCE suggests
better performance and operational effectiveness ( Murtala et al,
2018).
C. Owner-Oriented Profitability Measures
reflect how effectively firms generate returns for shareholders,
capturing the value created on invested capital. closely with
owner interests, guiding decisions on growth and stability.
significantly and positively impacts firm valuation, highlighting
its importance in assessing shareholder returns and business
health (Santoso and Nurhidayati, 2022).
 Return on Equity (ROE): Measure of a company’s profitability
that shows how effectively it uses shareholders’ equity to
 generate net income. It reflects the return earned on the
capital that shareholders have invested in the company. ROE is
a key indicator of financial performance, especially from the
perspective of equity investors, as it reveals how well
management is utilizing the funds provided by owners to grow
the business and deliver profits (Sinurat et al, 2025).
 Return on Common Equity (ROCE): Focuses specifically on
the returns generated for common shareholders, excluding
preferred equity from the calculation. It provides a more
precise measure of profitability attributable solely to common
stockholders, offering insight into the company’s ability to
create value for its primary equity investors ( Werner and Jarvis, 2025).

In financial performance analysis, the extensive use of multiple

ratios can lead to significant multicollinearity issues, where
variables are highly correlated and provide redundant
information. This redundancy not only complicates statistical
models but also reduces the interpretability of results. Therefore,
it is advisable to minimize the number of performance indicators
by selecting the most distinct and non-overlapping metrics that
capture different financial dimensions without duplication.

The streamlined financial metrics—Quick Ratio, Net Profit Margin,

ROIC, and Z-Score analysis—directly align with the research
objective of assessing how internal financial performance
moderates’ macroeconomic effects on firm value. These
measures enhance clarity by capturing liquidity resilience,
profitability sustainability, and capital efficiency, while Z-scores
provide predictive insight into financial distress under economic
shocks. Their integration ensures robust evaluation of firm
strength against inflation, currency depreciation, GDP
fluctuations, and interest rate changes

D. Suggested Streamlined Financial Metrics:

 Enhances clarity and managerial effectiveness. performance
indicators by potentially integrating them into formal reporting
(Maurer, 2025).
 Liquidity:
 Quick Ratio (instead of Current Ratio and Cash Ratio) – It
provides a more stringent assessment of short-term liquidity by
excluding inventory, making it less susceptible to industry-
specific distortions compared to the Current Ratio. The Cash
Ratio is overly restrictive and rarely used in practical financial
analysis.

 Profitability:

 Net Profit Margin (instead of Gross and Operating Margins) –

Since Net Profit Margin incorporates all expenses (operating,
interest, taxes), it provides a comprehensive view of
profitability, reducing the need for separate gross and
operating margin analysis.
 Return on Invested Capital (ROIC) (instead of ROA, ROCE,
and ROE) – ROIC is superior because it focuses on core
operational efficiency by excluding non-operating assets and
excess cash, unlike ROA. It also avoids the leverage distortions
present in ROE and provides a clearer measure of capital
efficiency than ROCE.
 Z-Score Analysis: Z-score models are statistical tools that
assess a company's financial health and bankruptcy risk by
combining multiple financial ratios into a single predictive
score. Three prominent variations of Z-score analysis—Altman
Z-Score, Kida Z-Score, and Sherrod Z-Score—have been
developed to address different industry and market contexts.
This section discusses their formulations, applications, and
comparative strengths (Medjoub and Houas, 2020).
 Altman (1968) developed a widely used bankruptcy prediction
model that combines five financial ratios to assess a company's
financial health. Originally designed for manufacturing firms, it
 evaluates liquidity, profitability, leverage, and efficiency,
classifying firms into safe, grey, or distress zones based on
their score. While highly effective for public manufacturing
companies, its reliance on market value and fixed weightings
limits its accuracy for private firms and non-manufacturing
sectors. (Elewa, 2022).
 Kida Z-Score modifies Altman’s model by adjusting
coefficients or substituting variables to better fit different
industries and economic environments. This adaptation is
particularly useful for service-based or privately held
companies, where traditional financial metrics may not apply.
However, since the model requires recalibration for each
sector, its results are less standardized than the original
Altman Z-score, making cross-industry comparisons
challenging (Babela and Renas Mohammed, 2016).
 Sherrod Z-Score is tailored for emerging markets like Egypt,
where financial conditions differ from developed economies. It
adjusts weightings to account for higher leverage tolerance,
currency volatility, and local regulatory frameworks. This
version improves bankruptcy prediction accuracy in regions
with informal financing practices but remains region-specific,
limiting its broader applicability (Babela and Renas Mohammed, 2016).

By analyzing these financial performance metrics, the research

aims to establish a clearer understanding of how internal factors
influence stock valuation in the context of macroeconomic
variables. This comprehensive approach will facilitate a better
grasp of the interplay between financial health and market
dynamics, providing valuable insights into the investment
landscape in Egypt.

2.3 Theoretical Framework

This study is anchored in a dual-theoretical framework that

examines how macroeconomic conditions and internal financial
performance influence stock value. By incorporating both market
value and fair value metrics, the research distinguishes between
observed investor sentiment and intrinsic firm valuation. This
comparison enables a deeper understanding of whether pricing
reflects fundamental value, offering insights into the informational
efficiency of the Egyptian stock market (Purkayastha and Filatotchev, 2023).

The theoretical foundation facilitates interpretation of firm

responses to macroeconomic shifts and performance signals. It
also guides the exploration of valuation mismatches and market
reactions, helping to characterize the type of market structure—
efficient, speculative, or sentiment-driven—prevailing in Egypt
(Khalil, 2015).

The theoretical framework anchors this study in the Efficient

Market Hypothesis (EMH) and Signaling Theory, both of which
provide insight into how stock values reflect economic information
(SARAOĞLU, 2017). Additionally, Agency Theory is considered to
explain how conflicts between managers and shareholders—
arising from divergent interests and information asymmetry—can
influence financial decisions and stock valuation. In markets with
weak governance structures (Sukendri et al, 2024)

This study applies EMH, Signaling, and Agency theories to

explain valuation dynamics in Egypt’s weak-form market. EMH
highlights inefficiencies where macroeconomic shocks distort
market value from fair value, while Signaling shows how financial
metrics moderate this gap by conveying firm resilience. Agency
theory adds that governance and performance mitigate
managerial distortions under volatility. Together, these
frameworks underscore the need to correlate market value with
fair value, ensuring a clearer understanding of macroeconomic
effects moderated by financial performance.

2.3.1. Efficient Market Hypothesis (EMH):

The Efficient Market Hypothesis (EMH) posits that financial
markets fully and instantly reflect all available information,
meaning that investors cannot consistently achieve higher-
than-average returns through arbitrage or market timing. EMH
exists in three forms: weak, semi-strong, and strong,
depending on how thoroughly information is integrated into
stock prices. The hypothesis serves as a foundation for
evaluating whether observed stock prices reflect intrinsic value
or are distorted by behavioral or informational inefficiencies
(Sharma and Thaker, 2015)
The Efficient Market Hypothesis (EMH) is categorized into three
levels: weak-form, which asserts that current stock prices
reflect all past market data; semi-strong form, where prices
incorporate all publicly available information; and strong-form,
which includes both public and private (insider) information.
The extent to which a market aligns with these forms
determines its informational efficiency (Yuliana M et al, 2024).
The three forms of the Efficient Market Hypothesis (EMH) vary
in how they treat information. The weak-form EMH posits that
only historical price and volume data are reflected in stock
prices, rendering corporate signals ineffective. Semi-strong
EMH assumes that all publicly available information, including
firm signals, is instantly priced into the market, thus
eliminating the potential for abnormal returns based on these
signals. Strong-form EMH goes further, asserting that even
private or insider information is already reflected in stock
prices, making signaling entirely redundant ( Nyakurukwa and
Seetharam, 2023).
EMH assumes varying degrees of market rationality. Under
weak-form EMH, investors cannot earn excess returns based on
historical trends, and signals are not considered actionable.
Semi-strong EMH permits that signals may affect prices, but
only briefly, as the market adjusts immediately to new public
data. In strong-form EMH, investor behavior is irrelevant to
pricing, as all information—public and private—is presumed
already incorporated into stock values (Yalçın, 2010).
EMH posits that stock prices reflect available information, yet
Egypt’s weak-form efficiency implies limited incorporation of
macroeconomic signals. This aligns with the study’s objective
by highlighting the potential divergence between market and
fair value, especially under shocks like currency depreciation,
where prices may lag fundamental performance, necessitating
financial metrics to explain valuation gaps.
2.3.2. Signaling Theory
Signaling Theory explains how firms communicate internal
information to investors through observable indicators—such
as dividends, capital structure, and profitability. In markets
characterized by asymmetric information, such signals can help
bridge the knowledge gap between corporate insiders and
investors, influencing valuation and stock performance.
Signaling is especially relevant in emerging economies, where
transparency is limited, and investor perception plays a larger
role in asset pricing (Eldomiaty et al., 2024).
Signaling Theory is grounded in the presence of asymmetric
information between firm insiders and external investors. It
proposes that managers convey hidden or internal information
to the market through observable actions—such as dividend
announcements, debt issuance, or profitability disclosures—
allowing investors to infer firm quality (Choudhury, 2024).
In Signaling Theory, market reactions depend heavily on
investor interpretation of firm-provided signals, particularly in
environments where transparency is limited. The theory
assumes that investors are not perfectly rational and use
managerial signals as proxies for otherwise inaccessible
information (Puspitaningtyas, 2019).
In Egypt’s asymmetric information environment, firms’ financial
performance metrics serve as signals to investors about
resilience against macroeconomic shocks. Linking to the
research objective, signaling explains how profitability,
liquidity, and solvency indicators moderate the relationship
between inflation, GDP, or currency volatility and valuation
outcomes, thereby influencing whether stock prices converge
toward or deviate from fair value.
2.3.3. Agency Theory
Agency Theory explores the potential conflicts of interest
between company managers and shareholders, particularly
when their objectives diverge. In relation to stock valuation, the
theory emphasizes that managerial actions—such as profit
manipulation, risk-heavy strategies, or selective disclosure—
may not necessarily serve shareholders' best interests. Such
misalignments are especially pronounced in emerging markets,
where oversight and governance structures are often less
robust (Yusof, 2016).
The Egyptian stock market largely exhibits weak-form
efficiency, meaning historical price patterns and public
disclosures have limited influence on stock prices. This
inefficiency allows investors to earn excess returns by
anticipating market trends, emphasizing the importance of
comparing market value to fair value for assessing true firm
worth. The literature suggests the Adaptive Market Hypothesis
(AMH) may better explain investor behavior in emerging
markets like Egypt, where low financial literacy and behavioral
biases often override rational pricing (Elgayar, 2025).
Given the lack of random walk behavior in Egypt’s stock
market, policy reforms are necessary to enhance market
efficiency. Regulatory bodies should play a more active role in
controlling speculative movements, minimizing insider trading,
and curbing herd mentality. Promoting financial literacy
through investor education and awareness campaigns is crucial
to mitigate irrational trading patterns. A dedicated regulatory
unit should monitor and verify the accuracy of financial news to
restore investor confidence and improve pricing integrity
(Abdelzaher, 2020).
 ElMosalamy and Gamal (2024) discussed The study's findings are
limited by the sample period, which may have been affected by
concurrent market events. It also struggles to capture the
lagged effects of currency devaluation across different sectors
and industries. Additionally, political instability and regime
changes were not explicitly accounted for, potentially skewing
the analysis of stock performance and market responses.
Agency Theory is particularly relevant in Egypt’s stock market,
where weak governance structures and limited regulatory
oversight amplify agency problems. Managerial decisions may
not always align with shareholder interests, leading to issues
such as earnings manipulation, excessive executive
compensation, and opaque disclosures. In an environment
where minority investor protections are relatively weak, these
agency conflicts can distort stock valuations and reduce
investor confidence. Enhancing corporate governance
standards and reinforcing transparency mechanisms are
essential to mitigate agency risks and support more accurate
firm valuation in Egypt’s evolving capital market ( Elgayar, 2024).
Agency theory highlights conflicts between managers and
shareholders, especially under economic stress. In Egypt,
macroeconomic volatility can incentivize short-term managerial
actions that distort reported market value relative to fair value.
By integrating financial performance as a moderating factor,
this study examines how strong internal governance and
efficiency can mitigate agency costs, aligning firm value with
fundamentals.

In my view, the dual-theoretical framework employed in this study

is essential, particularly due to the structural inefficiencies of the
Egyptian market. By leveraging both market and fair value
metrics, the study smartly tests the actual efficiency of price
discovery mechanisms. The summarized forms of EMH—weak,
semi-strong, and strong—offer a useful lens to assess how
information is absorbed. Egypt’s market behavior aligns more
with the weak-form efficiency, where historical data and public
disclosures only partially affect pricing. This mismatch justifies the
need for fair value analysis to uncover whether pricing reflects
investor sentiment or intrinsic firm performance, supporting
deeper evaluations of market rationality.

Given Egypt's status as an emerging economy, Signaling Theory

presents a more realistic understanding of how market
participants interpret firm behavior. In a context where disclosure
is often delayed or incomplete, observable managerial actions like
dividend announcements or changes in capital structure become
key indicators for investors seeking clarity. Unlike EMH’s
assumption of rational pricing, Signaling Theory accounts for the
information asymmetry and behavioral influences that dominate
the Egyptian stock market. Hence, this theoretical inclusion adds
practical depth, helping to explain how stock valuations are
shaped by both internal signals and external market noise.

Concept Assumption Role of Practical Use

on Info Signaling in Egypt

Signaling Central (used

Highly
Theory Asymmetric to bridge info
applicable
gap)

Weak-form Prices reflect Signals Partially

EMH past data only ignored applies

Semi-strong Prices reflect Signals priced

Rarely applies
EMH public info immediately

Strong-form Prices reflect Signals

Not applicable
EMH all info irrelevant

Comparative Role of Signaling and Market Efficiency in the

Egyptian Context
This table compares Signaling Theory and the different forms of
the Efficient Market Hypothesis (EMH) in terms of their
assumptions about information, the relevance of signaling, and
their practical applicability in Egypt. It highlights how asymmetric
information makes signaling central in Egypt’s weak-form efficient
market, whereas semi-strong and strong-form EMH rarely or do
not apply due to limited transparency and informational
inefficiencies.

The proposed research investigates Egyptian market performance

by comparing market value and fair value, offering a practical test
of the Efficient Market Hypothesis (EMH). If prices closely track
fair value, it would support semi-strong EMH; however, consistent
mismatches would suggest weak-form efficiency or inefficiency.
Analyzing how quickly and accurately prices adjust to
macroeconomic changes and public disclosures provides insight
into the market’s informational efficiency. By assessing lag times
and valuation gaps, the study highlights whether Egypt’s stock
market truly reflects available economic information or is driven
by noise and speculation.

Signaling Theory complements this by exploring how firm-level

financial actions—such as profitability changes or dividend
announcements—influence market perception. In Egypt’s
environment of asymmetric information, such signals often fill
gaps left by weak transparency and delayed disclosures. If these
signals cause market value to converge toward fair value, it
confirms investor reliance on managerial cues. The research,
therefore, sheds light on how investors interpret firm behavior in
a low-efficiency setting, revealing the real drivers of pricing and
providing deeper insight into behavioral patterns and sentiment
dynamics within the Egyptian stock market.

Incorporating Agency Theory enriches the analytical depth of this

study by addressing why observed market prices may diverge
from intrinsic valuations. While EMH and Signaling Theory explain
how information is processed and interpreted by investors,
Agency Theory focuses on the managerial behaviors that distort
that information. In Egypt’s capital market—characterized by
opaque disclosures, limited regulatory enforcement, and frequent
insider influence—agency conflicts are not just theoretical but
observable in pricing inefficiencies. This theory helps clarify why
fair value may deviate from market value, supporting the need for
a dual-perspective valuation approach in such an environment.

2.4 Relationship with Stock Market Value:

This section explores how macroeconomic factors, internal

financial performance, and theoretical perspectives relate to
stock market value, particularly within the Egyptian context. It
examines the extent to which market prices reflect firm
fundamentals in a setting marked by information asymmetry and
weak governance.

The analysis focuses on how macroeconomic indicators—such as

inflation, interest rates, GDP, and currency depreciation—affect
investor behavior and contribute to valuation discrepancies in
Egypt’s emerging market. It also considers how internal financial
performance—captured by profitability, liquidity, and Z-score—
moderates the influence of external shocks on stock valuation.
Sectoral differences are addressed by comparing firms with
domestic market dependence versus those with international
exposure. Finally, the section applies insights from the Efficient
Market Hypothesis (EMH), Signaling Theory, and Agency Theory to
interpret how observed stock prices may diverge from intrinsic
value, offering a broader understanding of pricing behavior in low-
efficiency environments like Egypt.

2.4.1. Macroeconomic Factors and Their Influence on

Stock Value.

Macroeconomic factors play a critical role in shaping stock market

behavior, particularly in emerging economies like Egypt where
markets are highly sensitive to external shocks. Variables such as
inflation, interest rates, GDP growth, and currency depreciation
directly influence investor sentiment, corporate earnings, and
overall market valuation. In contexts marked by structural
inefficiencies and limited transparency, these macroeconomic
shifts often lead to pricing distortions and volatility. This section
examines how these key indicators impact stock market value.

According to New Zealand foreign affairs (2025), Macroeconomic conditions

in Egypt continue to exert substantial influence on stock market
valuation, with each variable contributing uniquely to investor
behavior and market pricing.

Inflation, though projected to ease in FY2024/2025, remains a

central concern for investors, as elevated price levels erode
consumer purchasing power and corporate margins, often
resulting in compressed valuations for sectors dependent on
domestic consumption. At the same time.

GDP growth projection of 3.5% for FY2024/2025 and an improved

4.2% for FY2025/2026 signals potential for recovery, supported by
anticipated expansion in private consumption, tourism, and Gulf-
led infrastructure investment. This growth outlook positively
affects investor confidence and expected earnings, lifting stock
valuations, especially in consumer-facing and construction-linked
sectors. However.

Currency depreciation remains a persistent drag, raising import

costs, pressuring corporate profitability (particularly for firms with
foreign-denominated liabilities), and fueling capital outflows.
While exporters and tourism firms may benefit from a weaker
pound, the broader market often reacts negatively due to rising
debt burdens and inflationary spillovers. Collectively, these
macroeconomic forces underscore the volatility of Egypt’s market
and the sensitivity of stock prices to shifts in both domestic and
global economic indicators.
A. Effect of Inflation rate on Stock Market Value.

Based on the insights from the July 17, 2025 article by Sinéad Carew and
Elizabeth Howcroft, inflation continues to play a complex and
significant role in shaping stock market value. The U.S. producer
price index (PPI) data showed no monthly change in June,
signaling uncertainty in inflationary pressures. However, markets
remain cautious, as the inflation outlook is still clouded by the
delayed effects of tariffs and fluctuating inventories. This
uncertainty affects investor sentiment and contributes to stock
market volatility, particularly in inflation-sensitive sectors.

In broader terms, high inflation typically leads to increased

production costs, reduced consumer spending, and tighter profit
margins for companies—all of which can weigh on corporate
earnings and depress equity valuations. Additionally, inflation can
shape central bank policy, particularly interest rate decisions. In
the article, concerns were raised about the Federal Reserve's
stance on keeping interest rates steady amid inflation fears,
which in turn affected investor expectations and asset prices.
Investors often anticipate that persistent inflation will prompt rate
hikes or policy tightening, both of which can reduce the present
value of future earnings and discourage equity investments.

The article also highlights the broader market impact of inflation-

related uncertainty. Even with steady PPI data, fears of tariff-
induced inflation and depleted inventories muddle inflation
signals, making it difficult for investors to price risk accurately.
This uncertainty contributes to market jitteriness, pushing capital
towards safer assets like gold and government bonds when
inflation risks appear elevated. Thus, inflation remains a critical
factor influencing stock market value, particularly in
environments where fiscal and monetary policy responses are
uncertain or politically volatile.
In Egypt market, The findings of the Elmoghany (2024) study confirm
in the short run a negative relationship between inflation rate
changes and stock market returns in Egypt, particularly for
indices like EGX30 and T-bills. This result suggests that rising
inflation exerts downward pressure on equity performance due to
immediate cost shocks, reduced real earnings, and investor
uncertainty. These effects undermine confidence in the stock
market as a short-term store of value during inflationary periods.

The NARDL results show that both positive and negative inflation
shocks impact stock returns negatively and symmetrically for
some indices, and asymmetrically for others, such as the HFI
index. This suggests the market reacts not just to inflation levels
but also to the direction of change. However, the variation across
securities implies that short-term inflationary effects are not
uniform and may depend on sectoral sensitivity or firm-specific
fundamentals.

While the reviewed study identifies patterns, it lacks exploration

of internal firm dynamics and macro-behavioral mechanisms such
as investor sentiment. The current research addresses this by
incorporating firm-level financial performance as a moderating
factor. This framework allows for a more nuanced understanding
of how inflation affects stock value in Egypt over time and across
sectors.

B. Effect of Inflation rate on Stock Fair Value.

Most existing studies on the Egyptian market primarily focus on

nominal returns, emphasizing market value while overlooking
intrinsic valuation measures. Consequently, a notable research
gap exists in understanding how inflation impacts fair value
metrics—such as those derived from Free Cash Flow to the Firm
(FCFF) or Free Cash Flow to Equity (FCFE). This proposed study
aims to bridge that gap by estimating fair values using FCFF and
FCFE models and comparing them to market values across
periods of inflation volatility. This approach offers new insights
into whether inflation drives deviations between market prices
and fundamental valuations in Egypt—an area yet to be explored
in the literature.

C. Effect of GDP rate on Stock Market Value.

Fichtner and Joebges (2023) found that while economic theory posits that
GDP growth should positively influence stock market
performance, the paper finds limited empirical support for a
stable long-run relationship between GDP and stock indices in G7
countries post-1991. This challenges traditional models that
equate macroeconomic expansion with rising equity values,
highlighting a disconnect possibly caused by financial
globalization, changing investor behavior, or non-fundamental
drivers like speculation.

The study's asymmetric modeling reveals that GDP may react

more to stock market gains than losses, with stronger linkages in
Anglo-Saxon economies. This implies that financial structure—
specifically, market- versus bank-based systems—moderates how
macroeconomic signals are transmitted to markets. It also
suggests that simplistic linear models fail to capture the nuanced
and time-varying nature of the GDP-stock market relationship.

The findings suggest caution when using GDP trends alone to

predict equity market behavior. Policymakers and investors
should account for asymmetries, structural shifts, and external
demand influences. The lack of consistent cointegration also calls
into question models used in valuation and macro-finance
forecasts. A deeper understanding of market sentiment, risk
premia, and global capital flows is necessary to interpret stock
responses to GDP changes.

Ayyad (2023) study effectively outlines how Egypt’s GDP fluctuations

—triggered by political and global events—have historically
influenced stock market performance. Events such as the 2008
financial crisis, 2011 revolution, and 2016 currency float were
shown to significantly impact GDP growth and, consequently, EGX
indicators. This macroeconomic instability led to capital flight,
inflation surges, and depreciation of the pound, which
undermined investor confidence. Yet, reforms post-2016
contributed to market recovery, with GDP stabilization aligning
with increased EGX performance, indicating a strong link between
macroeconomic reform, GDP recovery, and improved stock
valuations.

Empirical analysis using the ARDL model confirms a long-term

equilibrium relationship between GDP (proxied by industrial
production) and EGX100. Notably, GDP growth positively affects
stock value in the long run by signaling economic expansion and
profitability. However, in the short run, unexpected GDP surges
may trigger concerns about tighter monetary policy, negatively
impacting stocks. This duality captures the complexity of market
reactions to GDP signals and suggests that investor expectations
and policy anticipations mediate the relationship, especially in a
transitional economy like Egypt.

The research highlights critical policy takeaways—GDP growth

through industrial production can stimulate the stock market if
supported by stable exchange and interest rates. It also
demonstrates that investors can use GDP trends as predictive
tools. However, the study's assumption of linearity may
oversimplify economic dynamics. Stock responses to GDP may
vary across sectors and policy phases, especially during boom-
bust cycles. Future research should incorporate asymmetric
models like NARDL to capture differential effects of GDP shocks
under varying economic regimes and improve investment
strategies aligned with Egypt’s evolving macroeconomic
landscape.

Gendy et al, (2025) examined study places minimal emphasis on GDP

as a driver of stock market valuation in Egypt, despite its well-
established macroeconomic significance. While GDP typically
reflects overall economic productivity and corporate profitability,
the study devotes greater focus to variables such as inflation,
interest rates, and foreign trade. This limited treatment of GDP
weakens the explanatory power of the model in understanding
broad-based movements in stock market value, particularly in an
emerging market like Egypt, where economic growth often
correlates with investor sentiment and capital market expansion.

Although existing literature often confirms a positive correlation

between GDP and stock market performance, the study’s
empirical approach does not adequately capture this. By using
aggregate indicators and simple regression methods, it overlooks
how GDP expectations, revisions, or nonlinear effects (e.g.,
diminishing returns in overheated growth periods) influence
investor behavior. As a result, the study underestimates GDP’s
consistently positive yet dynamic impact on market value in
Egypt, weakening its ability to provide a comprehensive picture of
economic-stock market interactions.

D. Effect of GDP on Stock Fair Value.

Touny and Abdelaziz (2025) conclude Given GDP's well-documented role

in shaping corporate earnings, investor sentiment, and capital
flows, its exclusion from the model leaves a significant
explanatory gap. The model’s inability to account for over 50% of
fair value variation suggests macro-level variables like GDP,
inflation, and currency trends likely play a pivotal but
unmeasured role.

relying on historical fair value as a predictor, without integrating

forward-looking indicators like GDP growth or fiscal policy
expectations, weakens the model’s policy relevance. Stock
markets are inherently reactive to national economic outlooks—
growth surges often lift valuations irrespective of micro-level
efficiency indicators. By excluding GDP, the paper fails to
distinguish whether observed stock price movements stem from
internal market dynamics or external economic momentum,
limiting its capacity to inform investment strategy or
policymaking.

While the interpretation of volume, turnover, and capitalization is

methodical, the economic meaning of these relationships could be
enriched. The negative volume effect is attributed to speculative
activity, but this remains speculative itself without GDP or
investor sentiment indices to support the claim. Similarly, the
positive effect of market capitalization could reflect broader
economic expansion rather than intrinsic efficiency. Without GDP
as a control variable, the model risks conflating market depth with
macroeconomic health, misrepresenting the source of valuation
gains. Integrating GDP would sharpen the model’s explanatory
precision and anchor it more firmly in real-world economic
behavior.

E. Effect of currency depreciation on Stock Market Value.

Fang and M. Miller (2002) effectively uses a bivariate GARCH-M model to

analyze how currency depreciation influences stock market
returns in East Asian economies during the 1997 crisis. While this
model captures volatility well, it assumes fixed correlation and
does not address endogeneity, limiting its explanatory power. A
structural VAR or time-varying correlation model could provide
deeper insights into causal dynamics.

Although the study finds a negative relationship between

currency depreciation and stock returns in most countries, it
overlooks structural and behavioral differences between markets.
Factors like investor sentiment, capital controls, and monetary
regimes—especially in Hong Kong—warrant more nuanced
treatment to explain heterogeneous responses.

The conclusions are relevant for emerging market investors,

emphasizing the risk of ignoring exchange rate levels and
volatility. However, the policy implications remain vague. Clearer
guidance for monetary authorities or risk management strategies
for investors would strengthen the paper’s practical value.

Rady et al. (2024) applies robust econometric models, notably VAR and
Granger causality, to examine the relationship between exchange
rates and stock prices. It effectively incorporates control variables
such as GDP and inflation and explores the moderating role of
interest rates. However, the analysis is limited by a small sample
size due to the low number of real estate firms on EGX and
missing or inconsistent data. These constraints may reduce the
statistical power and generalizability of the findings across
broader market sectors beyond real estate.

The paper reveals a negative, unidirectional relationship from

exchange rate depreciation to real estate stock prices, which
becomes bidirectional when interest rates are considered. This
demonstrates that currency depreciation currently exerts
downward pressure on stock values, especially in import-
dependent sectors like real estate. While the findings are
insightful, the paper could have benefitted from deeper
discussion on sectoral variability and from comparing real estate
with other affected industries. Additionally, the reliance on
historical data (2013–2023) under turbulent economic conditions
may limit applicability to more stable future periods.

This research provides practical value to investors and

policymakers by emphasizing the impact of macroeconomic
instability—especially exchange rate movements—on stock
performance. It encourages portfolio diversification and proactive
exchange rate monitoring. Theoretically, it adds to the limited
literature on Egypt’s market by integrating interest rate
moderation into the dynamic exchange rate-stock price nexus.
However, the study could be strengthened by expanding to panel
data or sectoral comparisons, which would allow for broader
policy recommendations and enhanced understanding of market-
wide implications beyond the real estate domain.

F. Effect of currency depreciation on Stock Fair Value.

Abd El-Aziz et al. (2024) addresses a relevant topic within Egypt’s

evolving economic environment; however, it lacks sufficient depth
in distinguishing between stock market reactions and intrinsic
(fair) firm value. Using Tobin’s Q as a proxy for fair value is
theoretically sound—it reflects the ratio of a firm's market value
to its asset replacement cost, capturing both investor sentiment
and asset productivity. Yet, the paper does not clearly justify why
Tobin’s Q was chosen over alternative models or how it isolates
firm fundamentals from speculative price behavior, especially in a
volatile currency environment like Egypt’s post-2016 float regime.

The study’s findings—rejecting the null hypothesis and confirming

a significant relationship between exchange rate changes and
firm value—are meaningful, but the interpretation could benefit
from stronger differentiation between nominal market value and
long-term fair value. In times of depreciation, market valuations
may be speculative or short-term reactive, while Tobin’s Q ideally
reflects enduring firm fundamentals. Without controlling for
factors like import dependency, export orientation, and capital
structure (especially FX (Foreign Exchange)-denominated debt),
the generalization of findings to “fair value” remains weak.

The recommendation to use Tobin’s Q in future valuation research

is valid but requires deeper analytical framing. Currency
depreciation affects both sides of the Q equation—market
capitalization and asset base—raising concern over how fair value
is captured during FX shocks. Moreover, since depreciation in
Egypt often stems from macro-policy shocks, studies should
control for concurrent inflation, interest rates, and sector
sensitivity. Thus, while the study uses appropriate tools, its
conclusions on firm value would be stronger with more granular
control variables and clearer separation between perceived and
intrinsic value.

In my view, macroeconomic factors—particularly inflation, GDP

growth, and currency depreciation—exert significant influence on
stock valuation in Egypt. However, much of the existing literature
focuses primarily on market value, overlooking the deeper
implications for intrinsic or fair value. This creates a misleading
impression of how firms are truly affected by macroeconomic
shocks, especially in a market characterized by inefficiencies and
volatility. A clearer understanding requires analytical frameworks
that extend beyond price trends and incorporate more
fundamental valuation methods.

2.4.2. Financial Performance Moderates the Impact of

Macro-economic Factors and Their Influence on Stock
Value.

Financial performance serves as a key internal moderator

influencing how macroeconomic factors impact a firm’s stock
value. Firms with strong liquidity, profitability, and high Z-scores—
such as those calculated by Altman, Kida, or Sherrod—tend to
exhibit greater financial stability and lower default risk. This
resilience enables them to better withstand adverse
macroeconomic shocks like inflation or currency depreciation,
helping preserve investor confidence and fair valuation. In
contrast, firms with low Z-scores signal financial distress, making
them more susceptible to external pressures. Therefore, Z-score
analysis enriches our understanding of how internal strength
moderates the macroeconomic-stock value relationship.

The paper by Fitri and Pramono (2023) emphasizes the moderating role
of financial performance in the relationship between
macroeconomic variables—such as inflation, exchange rates, and
interest rates—and stock returns. Macroeconomic shocks affect
firm value differently depending on internal financial conditions.
Specifically, firms with stronger profitability, liquidity, and
operational efficiency demonstrated reduced sensitivity to
external macroeconomic fluctuations, underscoring the buffer role
of internal performance in mitigating economic risk.

Moreover, the study supports using financial performance metrics

as strategic indicators to assess a firm’s resilience to macro-level
volatility. It shows that robust internal performance, including
measures like return on assets (ROA) and liquidity ratios, can
absorb and dilute the negative impact of economic downturns on
share value. These findings validate the importance of integrating
financial performance—potentially including multi-factor Z-scores
—as a moderating construct in studies assessing how currency
depreciation or other economic shocks influence fair or market
value of firms.

A. Liquidity as a Moderator of Inflation’s Effect on Firm

Value
Liquidity plays a critical role in mitigating the adverse effects of
inflation on firm value. Companies with higher current and
quick ratios can better manage input cost increases and pricing
pressures caused by inflation. This financial cushion enables
them to sustain operations, preserve margins, and maintain
investor confidence, thereby stabilizing their market and fair
valuations during inflationary periods. Michelle and Chusnah (2023)
found that liquidity buffered firms under inflation pressure,
effectively moderating its negative influence on shareholder
value.
Recent studies and references examine liquidity as a
moderator of inflation’s effect on stock market value or stock
returns. High liquidity helps stabilize discounted cash flows,
maintaining fair value.
B. Profitability as a Moderator of Inflation’s Effect on Firm
Value
Profitability, measured by return on invested capital (ROIC) and
 profit margin, enhances a firm’s resilience to inflation. Highly
profitable firms can absorb cost increases more efficiently and
maintain competitive pricing. This allows them to continue
generating shareholder value despite reduced purchasing
power in the broader economy, reducing the negative impact
of inflation on both market and fair value estimations. Isma et al.
(2023) suggests that earnings quality weakens inflation’s
negative effect on firm market value.
Direct studies testing profitability metrics such as FCFF, FCFE,
and EVA as moderators of inflation’s impact on stock fair value
are rare. Focus remains on accounting performance, not on
intrinsic valuation models. Current research should test how
profitability moderates’ inflation’s effect using DCF-based
metrics like FCFF to clarify the impact on fair value. Study lacks
valuation modeling (e.g., FCFF/FCFE), making its relevance to
fair value incomplete.
C. Liquidity as a Moderator of GDP’s Effect on Firm Value
Firms with strong liquidity are better positioned to capitalize on
economic growth or buffer against contraction during GDP
fluctuations. When GDP declines, liquid firms can continue
investing, cover operational expenses, and avoid distress sales,
supporting a stable valuation. Conversely, during economic
booms, they can swiftly seize growth opportunities, amplifying
the positive GDP effect on firm value. Nowicki et al. (2024) stated
that while specific GDP moderation studies are limited,
liquidity's general role in value resilience is well-documented.
A research gap exists in assessing whether liquidity amplifies
or mitigates GDP’s impact on intrinsic valuation, particularly in
emerging markets where GDP volatility is high. It is required to
integrate liquidity-GDP interactions into discounted cash flow
(DCF) models to refine equity valuation under varying market
conditions.
D. Profitability as a Moderator of GDP’s Effect on Firm
Value
 Profitability strengthens the link between GDP growth and firm
value by amplifying return potential. Profitable firms typically
enjoy higher market confidence and better access to capital
during expansionary phases. Even in slowdowns, firms with
strong margins demonstrate operational efficiency, which
cushions their valuation from GDP-related downturns and
contributes to a more robust perception of fair value. Gunardi et al.
(2024) research shows profitability not only improves firm value
directly but also enhances responsiveness to macroeconomic
upturns as Profitable firms enjoy stronger internal funding
during growth cycles, amplifying GDP-driven gains in firm
value.
One relevant paper using the Discounted Cash Flow (DCF)
method in stock valuation within the context of profitability as
a moderator of GDP’s effect on stock fair value is not explicitly
cited. Profitability enhances firm performance in expanding
economies. However, their analysis lacks forward-looking
valuation integration. A research gap exists in testing
profitability’s moderation of GDP shocks through intrinsic value
lenses.
E. Liquidity as a Moderator of Currency Depreciation’s
Effect on Firm Value
During currency depreciation, liquidity supports firms in
managing rising import costs and foreign liabilities. Sufficient
liquid reserves reduce the need for high-interest borrowing and
enable smooth currency hedging. This stability reassures
investors and mitigates valuation losses due to exchange rate
shocks, especially for companies heavily reliant on imported
inputs or foreign currency debt. Coppola et al. (2023) mention Liquid
firms in emerging markets exploit dominant currency (e.g.,
USD) debt markets to access deeper liquidity pools, reducing
refinancing risks during depreciation shocks.
Direct study explicitly linking liquidity as a moderator of
currency depreciation on stock fair value (measured by specific
 valuation models like FCFF, FCFE, or EVA) in Egypt is not
immediately available. While it doesn't directly use fair value
models like FCFF or FCFE, the principle of financial performance
(including liquidity) acting as a buffer against macroeconomic
impacts on stock returns (which are closely tied to changes in
stock value and implicitly, fair value) is applicable.

F. Profitability as a Moderator of Currency Depreciation’s

Effect on Firm Value
Profitable firms are more adaptable to currency shocks, as
strong earnings provide a buffer against increased costs and
revenue volatility. Those with foreign income streams may
even benefit from local currency depreciation. Consequently,
high profitability moderates the negative effect of currency
depreciation on firm value, maintaining fair value through
sustained investor trust and internal financial strength. Hussain et
al. (2024) stated that Although FX moderating effects are less
explored, profitability remains a critical buffer.
profitability buffers exchange shocks but stop short of valuation
implications. The gap is clear: how does profitability shield
FCFE or Tobin’s Q from currency depreciation? Future work
should incorporate cash flow-based valuation to test this.

G.Z-Score Moderation of Inflation’s Impact on Firm Value

The Altman Z-score—measuring financial health—likely
moderates inflation’s effect on firm value, similar to how FX
debt mediates exchange rate shocks in IMF studies. Strong Z-
score firms may better absorb inflation pressures, while weak
Z-score firms face amplified risks. Adapting the IMF’s
interaction-term approach, future research should test Z-score
× inflation effects on firm value, controlling for financial market
depth. This would clarify how financial resilience buffers macro
shocks.
H. Z-score as Moderator of GDP Effects on Firm Value
Though limited direct studies exist on Z-score moderating GDP
effects on firm value, insights from IMF research suggest that
composite financial health indicators—like the
Altman-Emerging-Market Z″-score—capture corporate
vulnerability under macro shocks, including exchange rate and
output volatility. Jiang and Sedik (2019) discuss that Z-scores could
mitigate GDP shocks by reducing refinancing risks or sustaining
investment during downturns. This aligns with "financial
flexibility" theories.
A direct paper explicitly combining the Discounted Cash Flow
(DCF) method in stock valuation with Z score as a moderator of
GDP's effect on stock fair value is not readily found. The
absence of studies combining Z-score, GDP, and intrinsic
valuation marks a valuable gap.

I. Z-score Moderation of Currency Depreciation Effects on

Firm Value
Research is scarce on the interaction between Z-score and
currency depreciation impact on firm value. However, firm-level
studies show exchange rate exposure depends on foreign-
currency leverage—one component captured in Z-score
frameworks. Jiang and Sedik (2019) show foreign-currency leverage—
a key Z-score component—significantly influences exchange
rate exposure. Findings suggest firms with weaker financial
health (low Z-scores) face amplified depreciation shocks due to
balance sheet fragilities. However, they do not tie this to
valuation outcomes like DCF or Tobin’s Q. The research gap lies
in modeling Z-score × depreciation on cash flow-based
valuation, especially in emerging markets.

This research underscores the critical role of financial

performance—measured by liquidity, profitability, and Z-score
—in moderating the effects of macroeconomic variables such
as inflation, GDP, and currency depreciation on firm value. The
 findings suggest that firms with stronger financial health
demonstrate greater resilience under economic stress,
preserving investor confidence and stabilizing valuations. By
examining how these internal financial indicators buffer
adverse external shocks, the study contributes to a more
comprehensive understanding of firm behavior in volatile
economic environments.

Despite existing studies exploring individual moderating effects

of liquidity, profitability, or Z-score, the literature remains
fragmented, lacking integrative models that assess their
simultaneous or comparative influence—especially under
varying macroeconomic shocks. Furthermore, little empirical
attention has been given to testing interactions such as Z-score
× inflation or profitability × currency depreciation within
emerging markets like Egypt. Studies rarely apply discounted
cash flow or intrinsic valuation techniques, resulting in a limited
view of how financial health truly affects firm value ( Mahmoud
Mohammed, 2020). This research addresses that gap by using fair
value-based metrics, filling a critical void in both theory and
application across sectoral and economic contexts.

2.4.3. Macroeconomic Factor’s time lag and Their

Influence on Stock Value.
Macroeconomic variables often influence stock values over
extended periods, with impacts emerging gradually through
corporate adjustments, investor sentiment shifts, and market
pricing changes (Elkahky et al., 2024). Understanding these lagged
effects is vital for accurate forecasting and resilience planning.
As Madurapperuma (2022) notes, such delays reflect the slow
transmission of economic signals into corporate performance
and investment decisions, making the temporal dimension a
critical factor in explaining sectoral and economic variations in
stock valuation dynamics.
A. Effect of Inflation rate lag time on Stock Market Value.
 Elmahgop and Sayed (2020) investigated the impact of inflation on
stock market returns in Sudan, with particular attention to both
short-term and long-term effects. Using monthly data and
applying the Autoregressive Distributed Lag (ARDL) bounds
testing approach, the study examined how inflation interacts
with stock market value over time. Their results showed a
significant negative effect of inflation on stock returns in both
horizons, suggesting that rising price levels erode investor
purchasing power, reduce real returns, and dampen investment
confidence. In the long term, the findings indicated persistent
adverse effects, reflecting limited market adaptability and
weak inflation-hedging mechanisms in the Sudanese equity
market.
Elmoghany (2024) article examines whether Egyptian stock market
returns, EGX indices, can hedge against inflation in both the
short and long term, using monthly data from March 2011 to
December 2023. Employing linear and nonlinear autoregressive
distributed lag models (ARDL & NARDL), it finds that in the long
run, inflation shocks (both positive and negative) are positively
and symmetrically related to stock returns — indicating strong
hedging capability. In contrast, in the short run, inflation shocks
negatively impact stock and T-bill returns, while government
bond returns remain unaffected.
B. Effect of Inflation rate lag time on Stock fair Value.
Globally, most research on inflation’s lagged effects targets
stock prices or returns, not intrinsic fair value from models like
FCFF, FCFE, EVA, or Tobin’s Q. Even when “value” is discussed,
it typically means market value. Existing studies, in Egypt and
abroad, using ARDL/NARDL focus on market price responses,
rarely on fundamental valuation. No work appears to examine
lagged inflation’s impact on DCF-based fair value, highlighting
a clear research gap both locally and internationally.
C. Effect of GDP rate lag time on Stock Market
 Mauro (2000) study investigates the relationship between GDP
growth and stock market returns in both emerging and
advanced economies, with a focus on lagged effects. Using
cross-country panel data from 1970–1998, the research applies
econometric regression models to assess whether GDP growth
rates predict subsequent stock performance. Value. The
relationship between output growth and lagged stock returns
shows a significant association with various stock market
characteristics, including the number of listed domestic firms,
the volume of initial public offerings, and, most notably, a high
market capitalization-to-GDP ratio and an English legal origin.
The study’s reliance on annual GDP data limits its ability to
capture short-term market reactions and may understate intra-
year volatility. combining emerging and advanced markets
risks obscuring structural and efficiency differences between
them. Finally, while lagged GDP–return correlations are
identified, the analysis does not definitively resolve causality,
leaving open the question of whether GDP growth drives
returns or vice versa.
Existing research on Egypt’s stock market generally finds a
positive contemporaneous relationship between GDP growth
and market performance, with expansions supporting higher
returns and contractions dampening investor sentiment.
However, studies rarely examine the delayed impact of GDP
changes, leaving uncertainty about whether economic growth
effects persist or materialize after a time lag. This gap limits
understanding of how macroeconomic momentum translates
into market valuation shifts over subsequent periods,
particularly in Egypt’s market.
[Link] of GDP rate lag time on Stock fair Value.
While it is possible that some research exists on the lagged
effects of GDP growth on stock fair value—measured through
intrinsic models like FCFF, FCFE, or EVA—such work could not
be in accessible academic databases. Existing studies focus
 almost exclusively on stock market prices or returns, often
equating “value” with market capitalization. This suggests
either a scarcity or limited visibility of such research, leaving a
notable gap, particularly for emerging markets like Egypt
where macroeconomic shifts may have delayed valuation
impacts.
E. Effect of currency depreciation lag time on Stock Market
value.
Javangwe and Takawira (2022) analyze South Africa’s stock market
response to exchange rate shifts using quarterly data from
1980–2020. Employing an ARDL model, they identify a long-
term negative relationship between currency depreciation and
stock returns; depreciation’s immediate effects can be positive
short-term but reversed in the long run. This indicates that
exchange rate innovations influence market valuation over
time, offering a time-lag insight into macroeconomic
transmission to equity performance.
Helmy (2024) investigates the asymmetric impact of exchange
rate fluctuations—particularly currency depreciation—on the
Egyptian stock market, focusing on both short- and long-run lag
effects. Using monthly data from January 2000 to June 2022,
the study applies ARDL and NARDL models to capture dynamic
relationships. The findings reveal that depreciation has a
stronger and more persistent positive effect on stock prices
compared to appreciation, with significant lagged responses
evident in both horizons, highlighting the market. A key
limitation is the reliance on aggregate market indices, which
masks sector-specific and firm-level variations in response to
currency depreciation.
F. Effect of currency depreciation lag time on Stock fair
value.
The literature review revealed no direct empirical evidence
investigating the lagged impact of currency depreciation on
stock fair value, particularly when assessed through intrinsic
 valuation models such as FCFF, FCFE, or EVA. While existing
studies often explore the relationship between exchange rate
fluctuations and stock prices or returns, no one specifically
addresses the delayed effect on fair value measures. This
points to a likely research gap, presenting an opportunity for
further study—especially in the context of emerging markets
such as Egypt.

While time-lag effects of macroeconomic factors such as inflation,

GDP growth, and currency depreciation on stock market values
have been studied extensively, the focus remains largely on
price-based metrics rather than intrinsic fair value. My view is that
this reflects a methodological bias toward market-based
indicators, overlooking the potentially richer insights from DCF-
based valuations, which could better capture the delayed
transmission of macroeconomic shocks into fundamental
corporate performance.

From my perspective, the absence of studies linking lagged

macroeconomic factors to fair value represents both a gap and an
opportunity. This is particularly true in emerging markets like
Egypt, where structural characteristics, market inefficiencies, and
sectoral heterogeneity may amplify or dampen these lagged
effects. Expanding research to integrate FCFF, FCFE, or EVA
models could yield more accurate and policy-relevant insights,
helping investors and policymakers understand the true long-term
economic value impact beyond short-term market reactions.

2.4.4. Financial Performance Moderates the Impact of

time lag Macro-economic Factors and Their Influence
on Stock Value.
The influence of macroeconomic factors on stock value and the
timing of their effects has been discussed in previous sections.
Financial performance plays a critical moderating role in this
relationship, influencing how firms absorb and respond to
delayed macroeconomic pressures (Ibrahimov et al., 2025).
 Companies with strong profitability, liquidity, and solvency may
buffer adverse lagged effects, while financially weaker firms
are more vulnerable to prolonged economic shifts. This
moderating effect underscores the need to integrate internal
performance metrics with macroeconomic analysis to assess
stock value resilience and long-term investment potential.
A. Liquidity and Inflation. Although no direct empirical studies
link liquidity to the lagged effects of inflation, existing research
(Michelle & Chusnah, 2023) supports liquidity as a stabilizer against
cost escalation and margin erosion. Firms with strong liquidity
are expected to better sustain operations and investor
confidence under delayed inflationary shocks. Yet, studies
seldom incorporate discounted cash flow (DCF)-based fair value
models, leaving a gap in understanding how liquidity
moderates’ inflation’s delayed effect on intrinsic value.
B. Profitability and Inflation. Profitability enhances firms’
resilience to inflation by absorbing delayed cost pressures and
preserving valuation. Empirical evidence (Isma et al., 2023) indicates
that earnings quality weakens inflation’s negative effect on
market value, though research still prioritizes accounting-based
measures over cash flow-based valuation (e.g., FCFF, FCFE).
Consequently, the moderating role of profitability in lagged
inflationary contexts—particularly in sustaining fair value—
remains insufficiently addressed.
C. Liquidity and GDP. Evidence on liquidity’s role in moderating
GDP’s lagged impact on firm value is sparse both globally and
in Egypt. Nonetheless, liquidity is theoretically expected to help
firms withstand downturns and exploit recovery opportunities,
thereby stabilizing valuations (Nowicki et al., 2024). Yet, the lack of
integration between liquidity-GDP interactions and valuation
modeling represents a notable research gap, especially in
volatile emerging markets.
[Link] and GDP. Research has not explicitly tested
profitability’s role in moderating the delayed influence of GDP
 on firm value. However, profitable firms are conceptually
positioned to sustain valuations during downturns and
capitalize on growth during recoveries. Gunardi et al. (2024) highlight
profitability’s direct contribution to firm value but stop short of
addressing its buffering role in lagged GDP effects. This reveals
a gap in linking profitability with intrinsic valuation approaches
under delayed macroeconomic shifts.
E. Liquidity and Currency Depreciation. Direct evidence on
liquidity moderating currency depreciation’s lagged effect is
limited. Nonetheless, firms with greater liquidity are
theoretically more capable of handling delayed increases in
input costs and foreign liabilities, thereby maintaining value.
Guerron and Jinnai (2022) suggest liquidity cushions depreciation
shocks, yet applications to fair value measures such as FCFF or
FCFE are absent, underscoring the need for valuation-based
investigations.
F. Profitability and Currency Depreciation. Empirical findings
remain inconclusive regarding profitability as a moderator of
currency depreciation’s lagged impact. Pratama and Akhmadi (2024)
confirm profitability’s positive influence on firm value in
Indonesia, while Tantawy and Abdel-Aziz (2024) reveal significant
currency effects in Egypt without testing profitability’s role.
This gap suggests a pressing need to examine profitability’s
capacity to sustain both market and fair valuations during
delayed currency shocks, particularly in emerging economies.
G.Z-Score and Inflation. No direct studies assess Z-score as a
moderator of inflation’s lagged effects on firm value. Still, as a
composite indicator of financial health, high Z-score firms are
expected to better absorb delayed inflationary pressures, while
weaker firms risk accelerated value erosion. The absence of
empirical work, especially in Egypt, presents a clear
opportunity for validation.
H. Z-Score and GDP. The moderating effect of Z-score on GDP’s
lagged impact has not been empirically established. Jiang and Sedik
 (2019) argue that solvency measures mitigate refinancing risks
and investment slowdowns during GDP volatility, suggesting
firms with stronger Z-scores can stabilize both market and fair
values. The lack of valuation-based models incorporating Z-
scores within GDP context constitutes a key research gap.
I. Z-Score and Currency Depreciation. Research showing Z-
score as a moderator of currency depreciation’s lagged effects
is virtually absent. Jiang and Sedik (2019) note that foreign currency
leverage—integral to Z-score metrics—exacerbates
depreciation exposure for weaker firms. High Z-scores may
thus shield firms from delayed depreciation shocks, yet this has
not been tested against valuation outcomes such as DCF or
Tobin’s Q. The need to integrate solvency indicators with
exchange rate research in Egypt is especially pronounced.
In sum, while theoretical plausibility and scattered empirical
findings affirm the buffering role of liquidity, profitability, and
Z-scores, significant gaps persist in testing their moderating
influence on time-lagged macroeconomic effects—particularly
regarding fair valuation. The lack of Egypt-specific evidence
and the absence of intrinsic valuation applications leave an
important space for future research.

The relationship between macroeconomic factors and firm value

in Egypt is multifaceted, shaped by both short-term and long-term
effects. Profitability, liquidity, and Z-score offer potential
moderating mechanisms: profitability sustains earnings capacity,
liquidity cushions external shocks, and Z-score reflects long-term
resilience. Yet, research examining financial performance as a
moderator of the temporal effects of macroeconomic variables
remains limited in Egypt and abroad. An additional gap lies in the
predominant reliance on market value, with insufficient
exploration of fair value metrics such as FCFF and FCFE.
Addressing these gaps may clarify how firms with stronger
financial performance can maintain closer alignment between
market and fair values under varying macroeconomic conditions.