Financial accounting provides quantitative informationof organizations that are based on contracts. Financial accounting alsoprovides discipline to the accounting statements that are not properly auditedand disclosed by managers. The quality of financial disclosure can impactfirms’ cash flow directly, in addition to influencing the cost of capital atwhich the cash flows are discounted. (Bushman & Smith, April 2003, p. 67). There are threedifferent types in which the financial accounting data which help enhance theeconomic performance, as found out by the authors. First: Financial informationof the organizations and their opponents help the investors and the managers toconstantly look out for investment opportunities.
An absence of reliableinformation would give them some returns but not the returns they are lookingfor. Even with struggles between the investors and the managers, the quality offinancial data helps to find out value creation without much errors. Thisensures the allocation of capital to the most. Second: the second method isthrough the role of governance.
The identification of investment opportunitiesis necessary but not sufficient to ensure efficient allocation of resources. (Bushman & Smith, April 2003, p. 68). Financial informationhelps the economic performance through discipline, selecting a better project,effectively managing the assets, not mistreating the investors wealth by themanagers or in-charge personnel, through the role of governance. Nevertheless,the authors argue that the impact of the governance role is indirect.
A stronggovernance would ensure the benefits of the managers to reduce by not lettingthem extract from the organizations or through reducing the legal cost that theshareholders have to undergo for the managers to earn through unfair methods.Third: the third method is by minimizing the liquidity risk of the organization.The liquidity of a company’s securities impacts the firms cost of capital. A majorcomponent of liquidity is adverse selection cost, which are reflected in the bid-askspread and market impact costs (Amihud & Mendelson, 2000).
Capital markets canhelp in big returns for the individual investors with low liquidness risk.