Review
Review the assigned resources to prepare for this discussion.
Financial Statements – An Introduction [00:02:50] (open in a new window)
How Are The Three Financial Statements Linked? — Mock IB Question [00:12:10] (open in new window)
Value Destruction and Financial Reporting Decisions (open in new window)
The Analysis of Corporate Governance Policy and Corporate Financial Performance (open in new window)
Understanding various financial statements and the relationship between them is foundational to financial decision-making. Apart from committing outright fraud, there are many perfectly legal approaches a firm can use to make its financial picture look better to an outside investor or another stakeholder. Corporate executives do not always focus on long-term, value-maximizing goals, but may be driven by corporate incentives to increase stock prices in the short run. In addition, corporate governance provisions may be misaligned with value-maximizing goals, causing managers to behave in a way that is not in the best interest of the organization.
Respond
Examine the executives’ motivations for focusing on short-term earnings over long-term, value-maximizing goals. From the perspective of an outside investor, how do you view the actions of management executives who are focused on improving earnings over maximizing value?
What are the ethical implications of this type of behavior?
How would you realign corporate governance policies or provisions to motivate managers to focus on long-term, value-maximizing goals, rather than short-term stock value?
