**3. Communication between the firm and its shareholders**

A public company must continuously communicate with investor's public to shrink the information gap that arises from information asymmetry between the management and existing or potential investors. Because, from the investors' point of view, the focus of communication is in stocks' value, which makes the dominant communication of financial nature. In terms of economic value [19, 20], communicated information should include the description of expected stock and other financing instruments profitability (i.e., the prosperity of the company and profitability) and the description of this profitability risk to establish appropriate discount rate [21]. Therefore, the financial manager plays a key role in the public company as a mediator between the company with its needs for assets and the financial market participant's and their earnings requirements [22].

Clearly, the communication between the public company and the investor's public is the key element of corporate governance. Communication reduces the information asymmetry and allows investors to rationally decide what to do with the public company financing instruments. However, this communication must not expose critical information to the competitor which will ensure that the company achieves greater value for shareholders. Limited communication takes place with the objective to attract the largest circle of investors that will supply the public company with capital and is, as such, targeted to paint an attractive picture of the society to the potential suppliers of capital [23].

including those implied according to the ownership equity. Overall, it represents the present

We can all agree that a perfect market does not exist. Although the financial markets, at least in the developed countries, can be considered efficient [18], they are far from a perfect market. In fact, the market values the company's earning power. Partly that power is contained in the value of the assets as the financial potential presented in the company's financial statements, and partly, it is the result of some kind of intangible assets that is visible only in the perfect market. Talking about the financial statements leads us to a new controversy, that of evaluation, which is expressed through the concept of fair value of the asset that is embedded in the

The questionable term fair value, originates from the principles of evaluation of the assets in the financial statements according to the principle of market value. Therefore, the fair value is embodied with the assumptions that it is the result of consensus between at least two parties (buyer and seller) that neither side is not in force and that all sides are well informed. This defines the price which only oscillates around values, so it is only exceptionally equal to true, intrinsic values. Even more, it seems questionable to talk about fair prices if they are not determined in a transparent market with many competitors on both sides (i.e., buyers and sellers). Bilaterally negotiated price can hardly result in satisfaction on both sides. It can hardly be a fair price. Subjective estimations are too often used to determine the fair value, and thus, fair values are even more questionable than historical values based on explicit and documented acquiring costs. Through the fair value principle, one can easily derive the value of firm's stocks or equity, by solving the balance sheet equation. The equity is equal to the difference between the value of the assets and the value of the obligations. The financial statements present mainly the real, tangible assets, and not the intangible assets that truly define the earning power. By ignoring the various reserves and by treating current, not yet distribute earnings, as retained earnings, the book value of equity can be viewed as par value shares plus a premium at the time of issuing, minus a value for which the company bought it back in treasury. This refers to a paid-in capital which is related to the outstanding stocks. This value is periodically increased with generated

value of expected cash flows of the bonds and other debts, as well as from the stocks.

dual normative basis of financial reporting.

120 Firm Value - Theory and Empirical Evidence

and non-distributed earnings (profit), and reduced through losses.

pant's and their earnings requirements [22].

**3. Communication between the firm and its shareholders**

A public company must continuously communicate with investor's public to shrink the information gap that arises from information asymmetry between the management and existing or potential investors. Because, from the investors' point of view, the focus of communication is in stocks' value, which makes the dominant communication of financial nature. In terms of economic value [19, 20], communicated information should include the description of expected stock and other financing instruments profitability (i.e., the prosperity of the company and profitability) and the description of this profitability risk to establish appropriate discount rate [21]. Therefore, the financial manager plays a key role in the public company as a mediator between the company with its needs for assets and the financial market particiPublic company communications with investor's public is conducted through various announcements, disclosures, and company activities in areas particularly sensitive to future profitability and the risks of holding the financing instruments of the company. This communication can be continuous or occasional. Continuous communication is achieved by the implementation of the adopted decisions in the areas of financing, investment, and dividend policy. Because it is vital to keep certain information away from the competition, this communication is most frequently implemented through signals that the public investors group receives when such procedures are carried out in the public company. Signaling occurs as a continuous communication that puts pressure on the company to pay close attention to decision-making and how it will reflect with public investors. One of the key signals is those which communicate fair relations with stockholders without any tendencies for expropriation of their wealth.

Information that can be publicly disclosed regardless of the competition can represent occasional or continuous communication. A good example is the publication of declared quarterly dividends, which represents a daily as well as specialized means of communication in many public companies in the US, and has become a regular form of communication. The announcement seeks to show strength and financial stability of public society which can continuously distribute profits to their owners and in this way, ensure a stable growing current income [22].

A special, extremely significant, part of communication is the financial reporting. Today, it is linked to the quarterly publication report, whereby the annual set of financial statements must pass a public verification from an independent audit. Financial reporting, today is, a standardized form of communication with the investor's public that, along with a standardized set of financial statements, includes specific justifications which make these reports easier to "read" for the interested investor audience. Because of continuity and the importance of this form of communication one cannot avoid cherry picking the information in the reports, in order to show the company as more attractive to investors.

More exhaustive and meaningful form of communication with the investor's public is the company's emission prospectus. Unlike financial reporting, it contains a set of financial statements and a set of pro-forma financial statements of the expected future period, as well as a number of other relevant information. It is a form of occasional communication that is compiled for the purposes of the emission of stocks, bonds, and other public company financing instruments. The most significant prospectus for the public company is the new common stock emission, while other emission prospectuses cover smaller content. How public companies emit bonds and other forms of obligation's much more often than stocks, emission is especially emphasizes occasional form of communication.

Public companies implement other forms of occasional public communications with different announcements of expected business results. It is a tendency that these announcements become more frequent. Because there is no standardized and verified form of communication with the investor's public, such announcements should be taken with a grain of salt because they are largely targeted to attract investors. So, for example, disclosures of the expected sales growth without a good explanation how it will track the growth of profits significantly alters the expected business future of the company.

**4. Accounting**

**4.1. Bookkeeping**

assumptions and canons.

accounting statements, and auditing.

Accounting is the most comprehensive and the best record of a company, encompassing various aspects of its business and, as such, serves as the basis for the preparation of financial statements. It can be defined in many different ways. Most definitions highlight bookkeeping as essential component of accounting. In this chapter, we define accounting as the art of communicating financial information of a business entity to the users of that information [27]. This communication takes a form of statements. Mathematical aspects of bookkeeping allow us to treat accounting as a field of mathematics [28]. Furthermore, accounting has to be viewed as an important part of corporate governance, because it is the starting point of company's communication with investor's public. We can distinguish three stages of accounting: bookkeeping,

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Even though it is not the only element of accounting, bookkeeping is the corner stone of the accounting [29]. It is the most comprehensive and detailed economic record of the company and therefore, every business event that is the subject of that evidence must be recorded properly through bookkeeping. Although bookkeeping practice changed throughout the course of history, today, the way we think about it is based on the paradigm of dual-sided bookkeeping. The double-sided entry of business events, which are also the subject of bookkeeping, admired the great writer [30], who declared it as one of the most beautiful inventions of mankind. The magic attraction of bookkeeping provides a system of equations which keeps track of the business enterprise that is, in its implicit form, manifested through eternal equality between the assets and the liabilities. On the other hand, in its explicit form, it demonstrates the interest of

the owner in the company, evaluated, of course, from the book value perspective.

Throughout the history of a company, bookkeeping takes continuous snapshot of the state of affairs and operations. When put together, these snapshots animate the history of the company. In that sense, the images of this history present the means for public company communication with investor's public. In this way, the history becomes the baseline for predicting the future, in the extent that it relates business data as a result of business events which are the subject of bookkeeping records. The documentary nature of the bookkeeping notes reduces the possibility of legal manipulation in an effort to make it more appealing to investors, by using the two-sided bookkeeping technique, and through it, it allows easier detection of irregularities. Of course, this applies only to those who are familiar with the bookkeeping math

The documentary nature and ability of data checking based on it, in the base has a premise, that is, the double-sided entry values are estimated on the basis of the occurrence of a business event. Thus, bookkeeping is the base for judging quantity and, in part, quality of the company's economy. For a public company, as the most demanding form of business organization,

it arises as the basis of the company communication with investor's public.

Periodic financial market crises significantly influence the volume and the frequency of the public company communications with investors, because it represents the opportunity to detect manipulation and deceit. Perfect example is the significant interest in corporate governance, which began after the great depression, so that even today the monograph [4] affects the academic debates about corporate governance. Similar event happened at the turn of the Millennium, after the collapse of the capital markets. This was primarily due to the collapse of the dot.com companies markets and scandals involving large world-known companies such as, for example, Enron, which ranked seventh in 1999 Fortune 500 list of best American companies [24]. This led to the passage of the Sarbanes-Oxley Act (SOX). The law was passed July 30, 2002, and named after Senator Paul Sarbanes and Representative Michael G. Oxley [25].

The reform in the area of corporate governance continued once again soon after the global world economic crisis started breaking down the American mortgage markets. Among the many legal acts and plans for the salvation of the economy, this reform resulted in a "Financial Regulatory Reform" [26]. The legislation seeks to restore confidence in the integrity of the American financial system and create a foundation for financial regulation and supervision that is simpler and more efficient, while protecting consumers and investors. The reform of the financial regulation seeks to achieve five objectives: (1) introduce stricter supervision and regulation of financial firms; (2) to establish a comprehensive supervision of financial markets; (3) to protect consumers and investors from financial abuse; (4) provide the Government with the necessary tools for managing financial crises; and (5) to raise international regulatory standards and improve international cooperation. With regard to communications of public company with investors, this reform underlines the importance of reporting on the risks and the risk management in the society.

In public company communications with investors, it is important to emphasize that it is often burdened by short-term requirements from the financial markets, in particular, in case markets which are overheated or, on the other hand, cooled down. One should look for the company's operation goal in long-term stocks value maximization in the market. In a long run, it is important, as much for the company's stability in generating new values, as it is for the threat to realize suboptimal result for stockholders by focusing on short run and cyclical effects [24]. This problem is associated with the problem of rewarding managers, as well as the whole corporate governance system that should emphasize long-term goals of public companies. It is necessary to emphasize the need to intensively focus on the company's communication with its long-run operations.
