Financial Reporting: Evaluating the Corporate Sector & Future Decisions - Essay Sample

Introduction

The prime objective of financial reporting is to give the necessary information regarding the financial status, the performance of institutions and the values depicted in the financial statements that were presumed to lead in the making of decisions. The people in need of the financial statements need the same due to the evaluation and predictions of the future in equity, growth, cash flow, and surpluses of the corporate sector business and future decisions (Hau, & Lai, 2016). Such institutions are highly dependent on data from the financial statements and the components associated. Values in reports from financial statements can either improve or decrease the confidence of the investors in an investment. It is absurd that investors do not want to put their resources where they cannot find value, and thus, they will look for an avenue where they can feel the amount of their support. The most captivating part of an investor is understanding the stock price. From ages, it is clear that the financial ratios have been the most straightforward practical tools in measuring the performances of institutions (Ben Naceur, & Zhang, 2016). The statements were initiated or else were presumed to be functional since the 19th century. The comments were beneficial to the financial analysts and accountants. Shareholders used the comments both internally and externally in making decisions towards the business economically. Some of the resolutions revolve around investments and performance enhancement activities (Ballings, Van den Poel, Hespeels, & Gryp, 2015). A lot of financial and accounting approaches have been designed lately. Fortunately, or unfortunately, the financial ratios have remained on top classically and fundamentally as models that support analysis in planning and financial analysis.

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Any system that can be termed as well functioning provides positive impacts on economic growth through a commendable allocation of the scarce. From any financial system, the significance and responsibility of a stock market aimed at realizing economic development is subtle because the stock market is the central point of the various transactions where the clients and vendors of securities come to a consensus of a specific price (Barnes, 2016). The prices again are influenced by diverse factors. Change of money from extensive borrowers to the principal investors is significant for the growth of the economy. It becomes necessary to raise the liquidity of the available assets and spread the risk to make wise decisions (Gamayuni, 2015). This makes sense because, in economic activity, a performing stock exchange is beneficial, primarily through growth and saving, sound allotment of invested resources, and direct stashes from other nations.

Investors have to look at the chances of the stock prices fluctuating, and that is considered high risk (Ballings, Van den Poel, Hespeels, & Gryp, 2015). Therefore it becomes a necessity for the investors to understand the impacts and implications that the prices have, thus affecting their decisions since their ultimate objectives is to make wealth (RPC, & WND, 2018). From efficient markets, all the necessary information on profit maximization and macro-economic variables, do not have the chance to earn huge profits. It now means that the stock prices are a reflection of the present positions at the stock market. Because many variables dictate the stock prices, researchers have pursued an interest in understanding the importance, exchange, and GDP (Barnes, 2016).

The financial systems of any country is a working together of the financial institutions, banking sectors, and the stock exchange markets (Flannery, 2017). The financial institutions, with the help of the government, help the private and public sectors enhance the financial and economic activities within the region (Ben Naceur, & Zhang, 2016). The stock exchange is a point of concern because of the twofold effects. The twofold finance is the corporate sector, and for the other one in the economic duties of a country. Many are the projects that are triggered by the impartiality created by the stock exchange market.

Different triggers can elevate or decrease the stock price index. Some of them could be initiated within the country from the foreign markets (Ballings, Van den Poel, Hespeels, & Gryp, 2015). The things that can be substantial from within can be termed as macroeconomic factors. The macroeconomic factors include the exchange rates, inflation, GDP, and the levels of interest rates. On the other hand, external triggers can be a feature such as the integrated capital market or the economic situation of a country. Exchange rates impact the stock price indexes considerably (Ballings et al., 2015). For instance, when the IDR lowers against the USD, the value of the imported goods and products becomes expensive, which affects domestic companies that bring in products for their production. The movement of stock prices is also affected when the price levels get impacted. It is because inflation harms the money value (Ballings et al., 2015). Partially, rise signals a negative impact on investors, especially in the capital market. If investors find it discouraging to invest in an institution, that alone affects the stock piece of the company towards the negative.

Again, the relationship between the development of any stock market and the financial supports has over the periods been a trigger towards the economic growth of any market (Barnes, 2016). Construction of the stock market can have a drastic implication to the commercial activities through four mechanisms, which include; venture expenses, domestic flow effects, organizational balance-sheet triggers, and lastly house-hold wealth triggers (Barnes, 2016). Studies have been consolidated, and there are conclusions that the economy of a region can be improved through investments, and that means the stakes have to be on the long-term. A long-term investment again means there has to be long-term funding. Hence, conclusions can be made that the stock market plays a significant role in the growth and development of a country's economy (Barnes, 2016). Through the same avenues, the distribution of wealth within the nation from the revenues collected is possible through enabling full ownership of company stock. Residents and willing investors can buy shares from the publicly listed institutions and at least be sure to have a percentage of the profits based on their capital shares. Therefore, it is translated that a healthy financial market is a product of robust economic growth and hence transmitting the impacts to the actual sectors. History has shown that whenever there is a downturn in the stock prices, most probably, the lives of masses could get affected (RPC, & WND, 2018). On another angle, the stronger the market gets on the economy, the real activities to the population becomes evident in areas such as consumption and investments.

Stock markets are also influenced by external forces such as the political and economic conditions of a country. Better returns are realized when the economic status of a country is functional, and the vice versa is also true. Financial institutions and links play a significant role in the success of an economy (Flannery, 2017). However, many crucial questions have arisen regarding the development of stock markets (Barnes, 2016). For instance, some items come up, such as whether the stock prices affect the lending business from banks and other financial institutions (Ricci, 2015)? Again, do the loans from financial institutions have an impact on transmitting financial jerk to the typical business sectors, and if there is an influence, what could it be?

Literature Review

Some of then researchers have drawn some strong proves on the relationships between the stock prices and the necessities of microeconomics and majorly on the general stock market index (Ballings et al., 2015). There are two approaches plus interpretations that have been designed and are majorly in use. The ideal market predictions have assumed that stock prices have the necessary information. The theories are those of arbitration that provide a structure whereby the implication of micro and macroeconomic variables can be counter checked (Akhtar, Sohail, & Haroon, 2017).

The theories are set in a way the stock prices vary from the response to the understanding of various variables. From dividends, earnings, cash flow predictions, net assets, benefits realized after there is capital employed, equity to debt ratio, and many others (Hau, & Lai, 2016). A better number of the variables are mentioned in financial statements or else derived from the information gathered from the same. From the analysis of behavioral finance theory, it is never reasonable for the investors. Thus the research on market efficiency and price security has nothing to do with the behavior of the investors - other researchers' term behavioral finance as equal to behavioral economics. Showcasing the theory captures and consolidates both disciplines of psychology and economics to share the information why and in what way people assume and decide wrongly or else come to decisions that are illogical when it comes to spending, saving, and borrowing (Berg, Saunders, & Steffen, 2016). Financial and economic approaches assume that people behave in a certain way and weigh the options from the disposed of information in the process of making decisions (Berg et al.,2016).

From a different approach, stock prices are presumed to trace its influences by macroeconomic factors and challenges that which prevails in the capital markets. There was a theory that was brought about by the name of the arbitrage pricing theory. The theory states that the risk of premia has a significant influence on the returns on securities, a crucial determinant of the asset price (Gamayuni, 2015). Other findings concluded that variables in economics affect the rates of discounts, which have a direct implication to the dividends in the future and that create an impact on the generation of cash flows of the institution involved. This example comes into play and aims at showing the interrelation between macro-economic and stock prices. An analysis was conducted in three regions, Japan, Singapore, and the USA, the results from interest and exchange rates were significant, and there was an interlink between the three markets. In another research, there was an intensive look at the relationship between the stock prices and the exchange rates. Unfortunately, in south Asian countries, there was no interlink between Pakistan and India (Velankar, Chandani, & Ahuja, 2017).

In industrial production, there is an interlink between the stock price and index of industrial production, and also there us a significant ultimate relationship, especially in Malaysia. Just like Pakistan went in pursuit of exploring the bivariate fatality between the prices of stock and variables of macroeconomic and there was a positive interlink. Conclusions were that macro elements subdued the stock prices and encouraged their movements. In other research studies, there was a contrast on the relationships between macro-economic and price stock (Ballings et al., 2015). There was a short run interlink between the elements of price stock and macroeconomics, for instance, the LSE 25 index.

On other studies, researchers have tried to explore the interlink between bank loans and stock prices and to explore the direction of fatalities (Almutair, 2015). As to the extent that the author's knowledge reaches, there has been extensive interaction between loans from financial institutions such as the banks and the prices of stock from japan and Malaysia (Flannery, 2017). Through an intensive a...