Kuka tarvitsee FS ja miksi? Flashcards
WHY financial reports are used?
- Without adequate information, we cannot properly judge the opportunities and risks of investment alternatives
- Financial reports are often the only publicly available source of information about a firm’s past performance, current health, and prospects for the future
For what purposes are financial statements used?
- Analytical tool
- Management report card
- Early warning signal
- Basis for prediction
BEMAri
Why are financial statements demanded?
Eli mikä luo kysynnän niille?
Financial statements are demanded because of their value as a source of information about company performance, financial condition, and stewardship of resources.
What guides the supply of financial statements?
Mikä ohjaa niiden tarjonnan määrää?
The supply of financial information is guided by the costs of producing and disseminating it and the benefits it will provide to the company.
Describe the supply of financial statements?
- Mandated reporting is designed to ensure minimum levels of reporting
- Companies frequently make voluntary disclosures that go beyond the minimum requirements -> Guided by cost/benefit considerations
- Companies having different financial reporting costs and benefits choose different accounting and reporting practices
What are the benefits and costs related to VOLUNTARY disclosure of financial statements?
Disclosure benefits
a) It lowers the cost of capital if company disclosures more
b) Avoid the “ lemons” problem = what ever the product/service, if you tell more, the buyers face less uncertainty, because they know that they are not buying “lemons”.
Disclosure costs
a) Information production
b) Competitive disadvantage
c) Litigation exposure
d) Political exposure
Why are financial statements valuable?
Financial statements are a valuable source of information about the firm’s past performance, current health, and prospects for the future
Are earnings and stock prices related?
YES!
Earnings and stock prices are strongly related.
TRUE OR FALSE:
Firm publishes its net income figures.
If the annual change in earnings is positive, then the earnings surprise is positive too?
A positive annual change in earnings defines a positive earnings surprise. So the cumulative abnormal returns are positive and stock price goes up. So the earnings were higher than expected.
A (negative) annual change in earnings defines (negative) earnings surprise. So earnings were lower than expected.
Surprise = analysts have given out their expected numbers and if the reported numbers are different, we have a “SURPRISE”.
Explain abnormal returns?
Abnormal return is the difference between the actual return of a security and the expected return.
Abnormal returns are market adjusted returns using the CRSP equal-weighted return.
What 3 words investors especially like to hear?
“Better than expected”
Does accounting information influence stock prices?
Yes! Accounting information influences stock prices heavily.
What is value relevance?
Value relevance is the ability of information disclosed by financial statements to capture and summarize firm value.
Value relevance can be measured through the statistical relations between information presented by financial statements and stock market values or returns.
What explains differences in stock prices?
ajattele earnings
If investors use accrual earnings to price stocks, then earnings differences across firms should explain differences in stock prices.
This is evidence on value relevance.
Firms with greater earnings have greater stock prices.
HOW TO CALCULATE TEST ON:
Earnings and stock prices
P = alfa + beta*X + e
Eli ->
Stock price = stock price at 0€ EPS + beta*earnings per share + random error
