(Masulis, 1980) researcher tested the hypothesis byclassifying firms’ leverage ratios as being above or below their industryaverage prior to announcing a new debt issue. Whether there is an effect onmarket returns for shareholder tested by researcher and that there nosignificant relationship available between firm’s debt level and that of itsindustry concern to the market.(Eriotis, 2002)They studied therelationship between debt-to equity ratio and firm’s profitability; they havetaken some points into consideration the level of firms’ investment and thedegree of market power. Researcher used panel data for various industries, coveringthe period 1995-96.
By hypothesis testing Researcher found a strong negativeimpact of the debt-to-equity ratio on firms? profitability. They got someconclusions on the basis of data analysis are as a) firms which prefer tofinance their investment activities through self-finance are more profitablethan firms which finance investment through borrowed capital; b) firms prefercompeting with each other than cooperating; c) firms use their investment infixed assets as a strategic variable to affect profitability.(Padey, 2005)They provide newinsights into the way in which capital structure and market power and capitalstructure and profitability are related. Researcher used Tobin’s Q to measureCapital structure and market power. It shows a cubic relationship, due to thecomplex interaction of market conditions, agency problems and bankruptcy costs.
Researcher found that the saucer-shaped relation between capital structure andprofitability, due to the interplay of agency costs, costs of externalfinancing and debt tax shield.(Koch, 1995)Researchersattempted to reconcile the two strands of literature that are Signaling theoryimplies that leverage should be positively associated with expected future cashflow and pecking order behavior reveal a negative simultaneous relationshipbetween cash flow and leverage. To overcome these theoretical and empiricalcontradictions researcher develop a model which allows leverage and Cash flow.They took a data for six industry and total 5936 observations for analysis andthey tested signaling theory and pecking order behavior.
Theyfound that the relevant signaling relationship is intertemporal in nature. Expectedfuture cash flow is associated with leverage positively this is given in thesignaling theory. On the other hand, they noted that pecking order behaviorfocuses on the contemporaneous relationship between cash flow and leverage.They found negative relationship Researchergiven some suggestion that both pecking order behavior and signalling theory isquite robust across the industries investigated, thus reconciliation of thecontrasting theoretical and empirical implications in the existing literatureis required.(Richardson, 2006) Researcher examinesthe extent of firm level over-investment of free cash flow. Researcher foundevidence that, consistent with agency cost explanations, over-investment isconcentrated in firms with the highest levels of free cash flow. Researcheralso tested the association betweenoverinvestment and governance structure of firm. They concluded that presenceof activist investor appears painful over investment.
(Shawn M. Carraher, 2013) Researcher taken sampleof 312 small firms to examine the use of financial statements. Researcheranalyzes two factors (1) affect the use of financial statements and (2) owners’comfort in interpreting financial statements. They found that owner comfort inusing financial statements to make decisions was inversely associated withfrequency of preparation and directly associated with level of revenues. Theyalso comment on whether the owner uses financial decisions when makingdecisions was indirectly associated with education level and having thestatements prepared externally and directly associated with owner comfortinterpreting the information in financial statements.
Conclusion Financialstatements show, among other things, the various outflows and inflows of cashand profits as also the financial position of a firm. This is why they are veryimportant for financial analysis and planning. The Income Statement is one suchstatement, which shows the firm’s income and expenses and the resulting profitsduring a particular fiscal period. Various measures of profits, such as grossprofit, operating profit, earning before taxes, and the net income after taxesare evident from Income Statement.Theother important financial statements is Balance Sheet, which shows the firm’svarious liabilities and assets as on a particular date, generally the closingday of a fiscal period. However, the balance sheet does not show the movementof funds during a particular fiscal period. That is why these two statementsare often supplemented with a funds flow statement.
Such a statement shows thedifferent sources of funds during a given period and how they are put todifferent uses thus affecting the working capital of the firm. Apart fromfunds-flow statement, a cash flow statement is often prepared as it shows thechanges in firm’s cash position. The sources and uses of funds are the sourcesand uses of cash. Hence to make a feasible business plan entrepreneur have toconsider proposed financial statement and forecasting of its performance for atleast three or five years.