This book describes valuation as an exercise in financial statement analysis. Students learn to view a firm through its financial statements and to carry out the appropriate financial statement analysis to value the firm’s debt and equity. The book takes an activist approach to investing, showing how the analyst challenges the current market price of a share by analyzing the fundamentals. With a careful assessment of accounting quality, accounting comes to life as it is integrated with the modern theory of finance to develop practical analysis and valuation tools for active investing.
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Focus on the output of financial statements, not the input (user focus vs. preparer). A number of financial statement analysis texts have chapters that explain how the accounting is done, many with material similar to that in intermediate accounting texts. This text asks what the financial statements tell you, not how they are prepared. However, the user of financial statements has to have some knowledge of accounting. Part 4 of the text covers many accounting details, but in a way that examines accounting methods from the point of view of how they help or hinder analysis. This way, students develop a critical perspective on the accounting to supplement the descriptive one acquired in accounting courses.
The text brings finance and accounting concepts together. In a typical program, students get their accounting "here" and their finance "there." Finance professors often do not cover how accrual accounting helps in valuation and settle for cash-flow analysis. Accounting professors teach accrual accounting and financial statement (ratio) analysis, but sometimes don't make the link to investment questions. This book links accounting and finance so that the financial statement analysis is guided by concepts of finance and central issues in finance equity and debt valuation within an accounting framework.
Penman takes a disciplinary approach to the subject. That is, it builds the analysis from "first principles" in a systematic way so students can see where things are coming from. The author believes that in the area of investments, where there are many suspect techniques, the student needs to have the confidence that the analysis is rigorous and sound. An alternative approach is to teach by metaphor through cases without a formal framework. Cases are included as applications of the analysis, but the book is, in the real sense, a textbook.
The text takes an activist approach to investing (and using financial statements for investing.) It does not assume that the market is efficient. It encourages students to think that a stock might be mispriced, so it gives students a motivation to be active about doing analysis. This in no way prejudges the market efficiency issue. It is a pedagogical device and the student might well discover, through analysis, that a particular stock's price is efficient.
This text shows how to move from concepts to practice. It is "product" oriented in that it aims to show how to build a concrete valuation technology based on the financial statements. Most of the analysis can be built into a spreadsheet program.
This text is "state of the art." It reflects recent developments in research and practice, particularly the use of residual-income (economic profit) techniques. Author Stephen Penman is among the top financial accounting academics in the world. He is extremely well known for his research, which is the framework of this textbook.
Penman incorporates cases, problems, and exercises from real world companies including Wal-Mart and Hewlett-Packard. The real world emphasis is a major strength of the text.The web site will have links to data sources and the financial press, including Standard & Poors (COMPUSTAT) data and Business Week sites, as well as relevant public sites. It will also include additional material and examples and a number of devices to help instructors deliver the course efficiently.
The George O. May Professor and the Morgan Stanley Research Scholar in the Graduate School of Business, Columbia University. He also serves as co-director of Columbia's Center for Excellence in Accounting and Security Analysis. Prior to his appointment at Columbia in 1999, Stephen Penman was the L.H. Penny Professor in the Walter A. Haas School of Business at the University of California at Berkeley. From 1990-95 he served a Chairman of the Professional Accounting Program and Chairman of the Accounting Faculty at Berkeley. He also initiated and chaired Berkeley's Annual Conference on Financial Reporting. He has served as a Visiting Professor at Columbia University and the London Business School of Economic. Professor Penman received a first-class honors degree in Commerce from the University of Queensland, Australia, and M.B.A. and Ph.D. degrees from the University of Chicago.
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