Question

Discuss financial (e.g., ratios and balance sheets analysis) and non- financial variables at play in valuing Fed Ex and UPS.

Answer 1

Financial and non- financial variables :

• Performance and accounting practices over the centuries have undergone significant changes, but in the course of these changes, the ultimate goal of accounting, which is the information needs of users of accounting services, has remained unchanged. In other words, concepts, principles, and procedures governing the current practice of accounting in fact reflect the needs of different groups using accounting data over time.
• Expectations, needs and demands of users are very diverse and often determine the type of information that must be provided to be the base of the judging, evaluation and making decisions. Due to different relationships that different groups using financial information have with the entity, they often need different types of information. Financial information is beyond the financial statements and includes another intelligence tools such as board reporting, periodic reports, and internet informing.
• Financial information is just not a finished product, but a process consisting of several components where many factors affect the quality of financial data. Moreover, financial information affects a variety of factors. During various investigations, the relationship among the quality of financial information and financial and non-financial variables of the firms has been evaluated. The main approach of this paper is effect of the financial and non-financial variables on the relationship between financial information and efficiency of investment and the factors affecting it.

The main hypothesis 1: there is a relationship between quality of financial information and investment efficiency in the capital market of Iran.
The main hypothesis 2: firm size affects the relationship between affect the quality of financial information and investment efficiency.
The main hypothesis 3: Cash held by the company affects the relationship between the quality of financial information and investment efficiency.
The main hypothesis 4: Opportunities for the company growth affect the relationship between the quality of financial information and investment efficiency.
The main hypothesis 5: objectivity of company assets affects the relationship between the quality of financial information and investment efficiency.

NON-FINANCIAL INFORMATION :

• The Basel Capital Accord and the recent financial crisis have provided renewed impetus for lenders to research and develop adequate default/failure prediction models for all of the corporate and retail sectors of their lending portfolios. The Basel II definition of financial distress, 90 days overdue on credit agreement payments, is the operational definition for major lenders.
• The literature on the modeling of credit risk for large, listed companies is extensive and gravitates between two approaches (1) the z-score approach of using historical accounting data to predict insolvency (e.g. Altman 1968) and (2) models which rely on securities market information (Merton, 1974).
• In retail lending, risk modeling can be undertaken using very large samples of high frequency consumer data and combinations of in-house portfolio data (e.g. payment history) and bureau data from the credit reference agencies to develop proprietary models. In the past, retail lending was mainly synonymous with consumer lending. More recently, following the introduction of Basel II, an increasing number of banks have started to reclassify commercial clients from the corporate area into the retail one.
• Although this decision may have been originally motivated by expected capital savings (see Altman and Sabato (2005)), financial institutions have soon realized that the major benefits were on the efficiency and profitability side. Banks are also realizing that small and medium sized companies are a distinct kind of client with specific needs and peculiarities that require risk management tools and methodologies specifically developed for them (see Altman and Sabato (2007)).

Firms’ financial statements and competitiveness: an analysis for European non-financial corporations using micro-based data :

• In order to maintain data confidentiality, the information and summary statistics of institutional micro datasets are often published in aggregated form, i.e. providing totals and averages. However, given the increasing need for studying agents’ heterogeneity, a number of additional statistics has been included in some publications in the few past years. In general, second and third moments of the distributions and percentiles of the studied variables could provide useful information on their underlying distributions (Bartelsman et al. 2004).
• The heterogeneity in firms’ balance-sheet variables is addressed, for example, in the Bank for the Account of Companies Harmonized (BACH) dataset of the European Committee for Central Balance Sheet Data Offices (ECCBSO), which provides weighted averages, medians, standard deviations and the 25th and 75th percentiles for several balance-sheet items in nine euro-area countries. In a similar way, the Eurosystem Competitiveness Research Network (CompNet) develops a much more detailed dataset providing the values of each decile of the distributions of both balance-sheet items and competitiveness indicators (Lopez Garcia et al. 2014). Last but not least the DynEmp OECD dataset on employment dynamics provides distributed micro-data analysis of business and employment dynamics and firm demographics (Criscuolo et al. 2014).
• In this paper, we propose then a methodology to mimic the anonymised firms’ micro-data using standard equations and assumptions about the distribution of the residuals that are most likely to reproduce the original dataset. The methodology we propose derives to some extent from other methods often used when facing incomplete information. Indeed the data we are using are only some kind of summary of the complete information we would like to reproduce.