ECON 1 Lecture Notes - Lecture 14: Business Analysis, Accrual, Financial Analysis
Document Summary
Chapter 1 a framework for business analysis and valuation using financial. The role of financial reporting in capital markets. Matching savings to business investment opportunities through the use of capital markets is complicated for at least three reasons: (1) information asymmetry between savers and entrepreneurs; (2) potentially conflicting interests credibility problems; (3) expertise asymmetry. Lemons problem: the problem that arises if entrepreneurs have better information about the quality of their business ideas than investors but are not able to credibly communicate this information. If this problem becomes severe enough, investors may no longer be willing to provide funds and capital markets could break down. Two types of intermediaries in the capital markets: (1) financial intermediaries (specialize in collecting, aggregating and investing funds from dispersed investors; and (2) information intermediaries (improve the credibility of information provided by the manager). Intermediaries try to resolve information asymmetry between managers and investors. Country with strong legal rights, lead to own investment decisions.
