Credible financial statements help firms raise financing and increase investment — Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

From Columbia Law School Blue Sky Blog

One of the primary purposes of financial statements is to facilitate the exchange of capital between investors and companies. The extent to which investors rely on the information reported in financial statements depends on the credibility of those financial statements – that is, the trust or faith investors have in the financial statements presented to them. Typically, companies establish the credibility of their financial statements by having an independent auditor verify the accuracy of those disclosures. However, the effect of auditing on financial statement credibility depends on the independence of the auditor and the rigor with which the audit is performed. An increase in reporting credibility can increase the degree to which investors rely on financial statement information for both writing debt (and other) contracts that govern the terms under which capital is exchanged and informing investors about companies’ operations and performance. As a result, an increase in reporting credibility can increase the company’s access to external finance, which can increase its ability to invest in new projects.

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A better way to evaluate investments — Eric So

MIT Sloan Asst. Prof. Eric So

In the wake of the economic crisis, many companies these days seem to be undervalued. The current earnings-to-price ratios are high and often market commentators argue that these ratios reflect good opportunities to invest. However, the emergence of undervalued stocks comes at a time of high market uncertainty so it’s more important than ever for investors to identify strong investment opportunities based on a company’s fundamentals. Read More »