ENG ELC 220 Lecture Notes - Lecture 12: Cash Flow Statement, Capital Market, Cash Flow
1 Nov 2020
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Document Summary
A framework for business analysis and valuation using financial statements. Financial statement analysis aims to bridge the gap between managers" information on firm strategies and the information that is disclosed, in order to serve suppliers of capital. On a conceptual level, savings of the economy is to be allocated to investment opportunities. This is a difficult problem for at least three reasons: Potentially conflicting interests credibility problems; entrepreneurs have incentive to inflate. The information and incentive issues are also described as the lemons problem. Half of the ideas are good and the other half are bad, and this is not distinguishable by investors, implying that every idea will be valued as average". This penalizes the good idea, as its value will be averaged by the bad ones. This makes the good entrepreneurs" to leave the capital market, and in the end the bad ideas crowd out the good ideas, and investors eventually lose confidence.
