Week 1 discussion 5

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Liberty University *

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BUSI 532

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Finance

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Apr 3, 2024

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Part 1: Market Forces on the Supply of Financial Statements There are multiple forces that influence the supply of financial statements. These forces include both involuntary forces, such as government regulations, and voluntary forces such as the three forces discussed in this forum: namely, the debt and equity markets, the managerial labor markets, and the market for corporate control. While each of these forces influences the supply of financial statements in a different way, their goal is the same. Their goal is to force companies to produce accurate, clear, and concise financial statements. Debt and Equity Financial Markets Financial statements are critical in order for the debt and equity markets to operate efficiently. Companies seek to raise capital at the lowest price possible, while investors demand a clear picture of the risk of investing in a particular debt or equity instrument (Revsine et al., 2021). Hence, in order to raise this capital at a low price, firms must illustrate that they are high-quality investments with a low-risk factor. To illustrate this, firms are incentivized to supply financial statements that prove they are financially stable with good growth potential. These statements are then utilized by analysts and investors to conduct a fundamental analysis of the firm and determine if its financial security is fairly valued. Even those investors that subscribe to the efficient market theory utilize a firm’s financial statements to determine the risk of a portfolio. Thus, if firms do not provide this information to the market, they run the risk of being perceived as a low-quality, high-risk “lemon” (Revsine et al., 2021, p. 1-8). Even firms whose securities are higher risk are incentivized to supply this information due to the fact that they wish to remain trustworthy and maintain a credible reputation in the eyes of investors and lenders. Consequently, for these reasons, the debt and equity markets influence the supply of financial statements. Managerial Labor Markets Employees and managers, especially executives, also influence the supply of financial statements. While corporations have been shifting away from basing executive compensation on reported earnings, nonetheless, the information reported on a firm’s financial statements still plays a role in determining the amount of an executive’s bonus (Fridson & Alvarez, 2022). Additionally, employees demand their employer’s financial statements in order to determine if their employer will be able to follow through on their promised benefits, such as pensions, profit- sharing plans, and stock ownership plans (Revsine et al., 2021). Thus, this demand influences firms to supply their employers and executives with financial statements in order to promote employee retention and justify the withholding or payout of performance-based bonuses. The Market for Corporate Control Financial statements form the basis for determining a business’s value for transactions such as mergers, acquisitions, and takeovers (Hitchner, 2017). Consequently, it is imperative for firms to provide clear and accurate financial statements in order to compete in this increasingly competitive market. For example, if a firm provides inaccurate financial statements to a valuation professional, they run the risk of either stating the value of the business at an overstated number or grossly undervaluing their business. This overstated value can result in potential litigation by the other party when they discover that the business was not accurately

valued. Furthermore, if the value of the business is understated, the owners of the firm will receive less than what is owed to them in an acquisition transaction. Thus, the forces surrounding the market of corporate control influence firms to provide accurate financial statements. Part 2: The Biblical Importance of Financial Information Although the overall theme of 2 Kings is the history of the faithful and unfaithful rulers of both the kingdoms of Israel and Judah, this book contains valuable nuggets about the importance of financial accounting. In 2 Kings 12:15, it is written, “They did not ask an accounting from those into whose hand they delivered the money to pay out to the workers, for they dealt honestly” ( New Revised Standard Version Catholic Edition , 1993). In other words, because they trusted the individuals who paid the wages to the workers, they did not ask for financial statements proving that the money was actually paid out honestly. Thus, we can deduce from this verse that the gathering of financial accounting information is necessary when dealing with the general public in order to ensure that individuals and firms are honest in their financial dealings. This line of reasoning is confirmed in 2 Kings 22:4 which states, “Go up to the high priest Hilkiah, and have him count the entire sum of the money that has been brought into the house of the Lord, which the keepers of the threshold have collected from the people” ( New Revised Standard Version Catholic Edition , 1993). In this verse, King Josiah commanded that the money received from the spoils of war and from various individuals be counted in order to ensure that none of it was fraudulently taken or lost. In other words, financial accounting was used in order to ensure that the assets were properly stewarded. Like 2 Kings 12:15, this verse is contrasted with 2 Kings 22:7 which states, “But no accounting shall be asked from them for the money that is delivered into their hand, for they deal honestly” ( New Revised Standard Version Catholic Edition , 1993). Once again, this verse highlights the fact that because these individuals were honest, financial accounting information was not required. Therefore, it is clear from these verses that the Bible illustrates the importance of using financial statements in order to deter fraud from those who might be tempted to be unethical or lack stewardship with money. Unfortunately, in this fallen world, fraud and deceit run rampant. Thus, it is imperative that firms and businesses supply financial accounting information in the form of financial statements. As the Bible points out, this will help to deter fraud and ensure that money is handled with good stewardship. References Fridson, M. S., & Alvarez, F. (2022). Financial statement analysis: A practitioner's guide (wiley finance) (5th ed.). Wiley. Hitchner, J. R. (2017). Financial valuation: Applications and models (4th ed.). Wiley. New Revised Standard Version Catholic Edition. (1993). Bible Gateway. https://www.biblegateway.com/versions/New-Revised-Standard- Version-Catholic-Edition-NRSVCE-Bible/#copy Links to an external site.