If information is identified and measured by management, but is not communicated to the stakeholders properly, the decision stands void, as it leaves the least or a negative impact on the market as a whole. It affects the dynamics of the market to a great extent. Hence from the decision-making viewpoint, financial communication plays a major role in shaping the investment decisions made by firms and the investors.
The basic role of financial communication plays a significant role in determining the behavior of the market participants in a high asymmetric information background. If we look at the modern business scenario, satisfying the needs of peripheral, as well as in-house stakeholders is a major concern. Financial is needed to be designed in such a way that the information provided by this is behaviorally rational and administratively manageable. Developments in the field of financial have also complemented this growth. In the post world war scenario, three major developments in the field of financial have made it possible to go for more extensive financial disclosures.
These developments are relative contribution costing, target costing, and activity-based costing. Financial communication has some basic objectives, those make it viable in the present market scenario. It enables the firms to go for a higher amount of disclosures. Whenever a firm will go for a higher amount of disclosure, it is sure that the transparency level prevailing in the market will go up.
Adverse selection will come down by virtue of reduction of information asymmetry. New investors will get timely assistance from firms in case they feel any sort of difficulties. Improvements in RTI act have augmented this feature.
The rising complexity in market structure has catalyzed the firms to publish higher quality of financial statements and that too, very frequently. Looking at the present market scenario, it can be conferred that financial communication provides a range of benefits to firms, as well as its stakeholders. As the transparency in the financial market increases, firms can easily get hold of the market sentiment. In turn, it provides familiarity and ease to the management while making any firm-wide decision. These decisions incorporate the stakeholders into account. Hence the future firm performance is well anticipated by investors of various scales and they can change and optimize their investment decisions on the basis of their well calculated anticipations.
Advantage also knocks at the doors of public firms as well. Government takes funding decisions on the basis of information provided by the firms. Hence it in turn reduces their cost of capital and provides a better capital inflow and project finance. Firms being funded through banks and financial institutions also get the similar kinds of benefits. To get debt finance from them, a very regular and reliable financial communication with them is needed. It ensures the higher transparency in fund disbursement and assigning the rate of interest. This also in turn reduces the cost of debt and interest burden. These factors consequently enhance the stakeholders with higher amount of return and augment their reliability on firm performance.
Mary Carnegie is a senior broker at one of the leading mortgage companies in the United States. Right now, she is successfully working her way to the top of the career ladder and is slowly getting nearer her goal to be part of an established finance company like Network Capital Funding Corp. Follow her on Twitter @maryjcarnegie