**7. Conclusion**

adjustments for additional financial risk. When you include the business portfolio approach in the values analysis, the group of companies and the need for group reporting further com-

Fourth, and also connected with the previous, the assets' fair value implicitly includes the risks of keeping the individual forms of assets. In no way does it include business risks that are connected with the way of combining these assets and using them in the company operations. Thus, it is evident that reporting based on a fair value is not intrinsically connected with risks of expected earning power of the company, and thus, it provides insufficient information about the risks for the investors in the company owners' equity. The risks included in the assets' fair value are not essential for equity investors, but for creditors, and especially for commercial banks that modify its internal credit ratings and so reduce the asymmetry of

Risk and yield are key value components. Value is realized by risk-reward trade-off during specific time. In the context of economic value, risks determine risk-adjusted discount rate for discounting expected yields, expressed by cash flows. According to modern portfolio theory, the only relevant is systematic or market risk, meaning the risk that could not be avoided by diversification [46, 47]. These assumptions are built into the CAPM [48] as still the most popu-

The risk of achieving expected cash flows is one of the key value components. It is therefore logical that risk management is one of the areas of value management and a means of achieving greater value. Primarily, this is the management of financial risks, and therefore diversification imposes as a means of reducing risk. Diversification helps avoid a significant part of the total risk, the specific part, based on the principle "don't keep all eggs in the same basket." Diversification is basis for financial investments portfolio management. Although the diversification scope of the real investment is limited, diversification can also reduce the risk of keeping such investments. Thus, regardless of the controversy should the company diversify

The increased importance of risk management outside the diversification area appeared at the beginning of 1970s, when, due to leaving the Breton Woods Agreements and the oil shock, significant currency and interest rate risks have emerged. At the same time financial futures contracts, financial options, and other financial derivatives appeared, as the powerful tools to reduce, and even eliminate these risks [49]. The most intense managing of such specific financial risks was in the banks and financial institutions, partially due to the fact that these companies employed most highly educated and well-trained financial analysts, and partly under the influence of financial supervision [50]. Specific risks managing practice transferred to non-financial companies, so that it has become an integral part of the corporate

In modern conditions, risks management becomes an organized activity. Financial institutions are encouraged by financial supervision. Other public companies also require organized

its activities or not, today, it is difficult to find a mono product company.

plicates the valuation.

134 Firm Value - Theory and Empirical Evidence

**6.2. Risk management**

governance [51].

information in relation to other investors.

lar model for establishing risk-adjusted discount rate.

Although the financial function is one of the fundamental functions of every company, Chief Financial Officer (CFO), as stated in this analysis, is needed only for the public companies. He or she is a member of the company's Board whose key task is permanent communication with the investor's public. In that sense, he is the procurator of the Chief Executive Officer (CEO) in the area of mediation between the needs of the company for the money and capital and investor's public. CFO is also responsible for other financial operations: treasurer and controller of the business. Thus, CFO is the most responsible person for the financial statement presentation, as the CEO Deputy, who bears the ultimate responsibility running the business. An accountant may only be responsible for the preparation and the presentation of accounting statements. Because accounting statements are the basis for the financial statements preparation, the responsibility of the accountant is internal, toward the CFO and the Board, and not external, toward the investor's public. Financial officer is not required in private companies because the integrity of the communication for them is an unnecessary and an expensive activity. These companies report for tax purposes and some wider control requirements of the State.

Based on the analysis of the practices and institutional framework of the company's communication with the investor's public, in the context of the totality of corporate management, a special attention is paid to the communication through financial reporting, as it is today commonly observed in the standard set of financial statements, which are indeed accounting statements presented with the combination of historical and fair market prices. The chapter determinates that this reporting practice is not oriented toward investors in public company equities, because this practice enables sufficient insight in the expected earnings power and the risks to achieve it. In that context, a request is set that the correct financial reporting oriented to existing and prospective investors in the company equity, must contain a sufficient objectivized description of the reached earnings power and financial potential in accounting reports to establish the expected earnings power and risks to achieve it, in order to establish the appropriate discount rate.

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Today's financial reporting is institutionally complex because of mixed evaluation bases, historical and fair market value. Standards constantly change, most commonly by broadening the evaluation toward fair market value. This reporting is oriented toward the evaluation of fair market value of assets that the company owns rather than the evaluation oriented to company earnings power that is in the focus of equity investors. Thus, this reporting is oriented to landers. Assets fair market value orientation is not comprehensive, because it commonly excludes externalities, uniqueness of assets combining and intangibles from evaluation. Therefore, it is oriented to lenders showing tangible assets value as company debts collateral. The fair value of assets lags behind earnings power valuation, at least because the evaluation of earnings retained as investment potential are recognized by the market through the net present value of expected investments. Also, fair value is targeted and burdened with subjectivity and evaluation toward painting a picture that will attract investors as the suppliers of company capital.

The chapter develops literature review around the quality of company communications and its potential impact on firm value and firm valuation. It is also primary oriented on financial reporting as the analytical framework for fundamental analysis of the company and its common stocks. Thus, review is limited on this main form of communication. Therefore, it is interesting to investigate the impact of other form of firm communications with investor's public on equity valuation. Another interesting area of investigation is the possibility of impact of fair market principles on earnings management. According to the goals of the chapter, there are many possibilities for further investigation in secondary and primary data, to determine factors that can improve financial reporting and other form of communication with equity investors, particularly about the risk exposure of the firm.
