Financial modelling and the quality of corporate reports

Most financial models are, directly or indirectly, based on information provided by the very firms that are being modelled. This is self-evident when items from financial statements are used in models, as is commonly done. But also stock prices, that are determined by buyers and sellers, are to a large extent based on information from the traded firms. Even scenarios of future expected returns and the volatility of those returns are modelled after the prospects that firms see for themselves and the patterns that emerge from firms' histories. The information generated by the corporate sector is processed by a whole industry, ranging from rating agencies and financial analysts to the financial press. Ultimately, the information finds its way into investment decisions and into our models.

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