Why investors will rely on non-financial statement forms of information to facilitate the efficient allocation of...

Why investors will rely on non-financial statement forms of information to facilitate the efficient allocation of resources?

Expert Solution

Investors rely on financial as well as non-financial information for their investment. Recent research on behavioural finances specifies that almost all (well educated) investors identify and seek non-financial information.

Following Non-financial information is used by investors. Reaons are given therin.

Sustainability of entity: How sustainable the entity is in long term. Various Solvancy Ratios will be used by potential investors (more specifically - corporate investors) to understand the solvancy of the entity. Once the solvancy is satisfied, sustainability of the position in the market is seen by the investors by comparing with the compititors.
CSR: Corporate Social Responsibility is essential part of every corporation. This shows how the corporation sees its society and how much is it beneficial to the society. This is how corporate keep up their goodwill in the minds of people and stay sustainable.
Qualitative Poicy Statements: Customer retention is very essential. Customers expect quality goods and services. Thus, quality statements of company is seen carefully by the long term investors.
Third Party Assurance: Third party are independent entities that have nothing to do with this company. Thus, their credit guarantee matters alot to the investors. Third party do not lie.
Organisational Structure: Is the organisation a company? A partnership firm? a HUF? or Sole Proprietor? Next question is - Are the management active in decision making and adopting? are they fast enough to change with the short term changes in the environment? Do they have participative management or bureaucratic? Who are the Directors, Managers? Many such question are asked by the investors.
Any legal issues: One of the most important factos that an investor sees is into legal matter. If any legal cases are being fought in the court of law, the credibility goes down. Generally, businesses have legal issues. But the nature of crime/ mistake/ error/ fraud decides if the investor is interested.
Corporate Governance: Governance is the factor that is getting a broader meaning these days. It is also an important factor. It comprises of all the processes, rules and laws that govern the company. better the company governance, better is customer and employee satisfaction, hence better are returns for the investors.

Conclusion: Financial information gives a sense of return guarantee for an investor. But non-financial information gives reliability for the inestment. Long term investors, creditors (definitely) seek the non-financial information that assures them the return of funds - Principal and Interest.

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ekkarill92 answered 1 year ago

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