Corporate Financial Reporting: Its Roles in Capital Market

Topics: Investment, Economics, Financial statements Pages: 6 (2228 words) Published: August 12, 2013
In capital market, the financial reporting and corporate disclosure are important since they can provide useful and necessary information in order to drive the efficient market. From the given research paper, there are many researches on financial reporting and corporate disclosure. The researches examine the forces that enhance the demand for the financial reporting and disclosure in a modern capital market economy and the forces that give rise to the institution that ensure the creditability of the financial reporting and disclosure. The paper reviews on the regulation, effectiveness of auditor, and information intermediaries that are related to the financial reporting and corporate disclosure. The economic determinants and the capital market consequences of managers’ financial reporting and disclosure decision were examined in this research paper as well. A critical challenge part in every economic is how to optimize the allocation of saving and investment opportunities. Economies that do well in optimizing the allocation between saving and investing can increase new business ideas, jobs, and wealth at the rapid speed. There are many new and existing businesses that would like to attract those saving people to fund their business. However, there is the complication in matching those saving and investment opportunities which may arise from the information problem and the agency problem. These two problems give rise to the demand of financial reporting and corporate disclosure. The information problem arises from the companies have better information about the business than the savers do and the companies have incentive to increase the value of their business idea. The information problem can be resolved by the contract between the companies and the savors in order to give incentive for the companies to provide the full set of disclosure and business information. The regulations that require the business to disclose all the private information and the financial intermediaries can also solve the information problem. If the information problem cannot be resolved, the capital market can be broken down since the savors cannot distinguish which business idea is good or bad and the bad business idea can take this opportunity to value their idea as a good one. The agency problem arises from once the savors invest in the business and the companies use those funds in the ways that can be harmful to the interest of the savors. This agency problem can be solved by the contract that requires the companies to disclose all the relevant information in order to allow the savors to monitor and evaluate the management. Another way to solve this agency problem is set up the board of director. Since most of the time, the financial report and corporate disclosure are prepared by using the accrual accounting rather than the cash accounting method. The accounting conventions and regulations are set up in order to comply with the complexities of the accrual accounting method, deal with the expectation of the cash consequences of the economic transactions, solve both information and agency problem, and to ensure that the useful and necessary information is disclosed for the investors. Most companies in the capital market are required to follow the reporting and disclosure rules stated in the conventions and regulations...
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