Theoretical Background and Capital Market Evidence – A European Perspective
All these issues are of considerable interest for standard setters and policy makers, whose primary aims are in fact to provide investors with useful information for their decision-making process and to allow firms to have access to a more efficient and cost-effective capital market.
153 Conclusions Standard setters, regulators and policy makers all have vital interest in the effect of financial reporting on the economy. This interest is due to the economic consequences associated with financial information. Financial information influences investors’ behaviour with respect to portfolio selec- tion, which affects security prices and, therefore, the terms on which a firm obtains additional financing. This, in turn, affects the firm’s cost of capital and alters the nature of the projects undertaken. In a capitalist economy, securities markets are the primary vehicle whereby capital is raised and allocated to competing investment needs. Consequently, it is socially desirable that these markets work well. From this perspective, regulators expect financial reporting to play a fundamen- tal role in reducing information asymmetries. Good financial reporting provides favourable climate for capital mar- kets because of its effect on the perceived fairness of such markets. Inves- tors are more willing to invest funds in markets if there is greater disclosure and less risk of fraud or misrepresentation about the productive opportu- nities of the firm issuing securities. The subsequent marketability of secu- rities is also a function of the perceived fairness of capital markets. If capi- tal markets are efficient with respect to a rich, comprehensive information system, investors are less concerned about information asymmetries at the time they buy and sell their securities and they are more willing to invest. On the contrary, information asymmetries negatively affect capital mar- kets with damages for economic growth, job creation and personal wealth....
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