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  • September 2001
  • Background Note
  • HBS Case Collection

Financial Reporting Environment, The

By: Paul M. Healy, Amy P. Hutton, Robert S. Kaplan and Krishna G. Palepu
  • Format:Print
  • | Pages:11
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Abstract

Provides a framework for understanding the role of financial reporting and various intermediaries as mechanisms for reducing both adverse selection and moral hazard problems in capital markets. Financial reports reduce adverse selection by providing basic information for investors and their agents before they make initial capital resource allocation decisions. Subsequently, after capital is allocated to particular business ventures, financial reports reduce moral hazard between managers and investors by supplying information used in contracting between investors and managers to reduce conflicts of interests. Various institutional mechanisms and information intermediaries monitor and limit the manipulation of reported information by managers and constrain managers' ability to act in their own self-interest, rather than investors' interests. They also improve information production, reduce incentive conflicts, and enable capital markets to function effectively and efficiently, channeling the economy's savings to the most productive opportunities.

Keywords

Financial Reporting; Financial Statements; Capital Markets; Venture Capital; Corporate Disclosure; Conflict of Interests

Citation

Healy, Paul M., Amy P. Hutton, Robert S. Kaplan, and Krishna G. Palepu. "Financial Reporting Environment, The." Harvard Business School Background Note 102-029, September 2001.
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About The Authors

Paul M. Healy

Accounting and Management
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Robert S. Kaplan

Accounting and Management
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Krishna G. Palepu

Accounting and Management
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