1. Financial Statements and Data Analysis (FIN357) TIP If you do not understand something, ask me! Administrative Issues and Course Overview

2. 2 The instructor zMy name is Donglin Li. zEmail: donglinli2006@yahoo.com, or donglin@sfsu.edu ) donglinli2006@yahoo.com donglin@sfsu.edu zOffice hours: Mon 14:00-17:00, Tu 13:00-14:00, Bus 315 zhttp://online.sfsu.edu/~donglin/courses.htmlhttp://online.sfsu.edu/~donglin/courses.html zResearch interest: xCorporate finance: Agency cost, overinvestment xAccounting: Financial Statement Analysis, Market Anomalies xCredit Risk Analysis

3. 3 My expectation in this course zI want everyone in the room to be able to yunderstand fundamental financial statements yidentify potential areas of earnings manipulation and earnings management and make necessary adjustments ycarry out basic valuation analysis and credit analysis ymaster a set of statistical tools that will help you identify the relation between some accounting variables/ratios and stock returns.

4. 4 My experience ystudents who come to classes, listen, do problems, do projects, take tests, review the issues, and think, usually do well. ystudents who do not come to classes typically do poorly.

5. 5 Textbooks z“Financial Statement Analysis: A Global Perspective” By Robinson, Munter, and Grant, Pearson/Prentice Hall.

6. 6 Prerequisite zFIN350 with a grade of C- or better and ISYS 263 or pass computer information system proficiency test. zIn addition, you should have a good knowledge of financial accounting and statistics.

7. 7 For the 2 nd half course, zyou may use any statistics/econometrics textbook that you are familiar with. The textbook should cover regression analysis. z“Analysis of Financial Data”, By Gary Koop, John Wiley z“Introductory Econometrics with Applications” By Ramanathan, 5e, South-Western.

8. 8 Add, drop and withdrawal policy zThe business school has the policy for add, drop and withdrawal yIn the first four weeks, you have to get enrolled in the class, if you want. yStudents can withdraw at most once.

9. 9 Homework zThe best way to learn new concepts is to work through some problems. The solution will be posted on my web. zI will also put lecture slides and in-class- work on my web.

10. 10 Projects zYou need to work independently on the 2 projects. zYou need to have access to a PC.

11. 11 In-Class-Work zThere will be 5 in-class work assignments. zThe 2 lowest in-class-work scores will be dropped. zThe schedule of these in-class projects will not be announced in advance, so just come to the lectures.

12. 12 The quizzes and final exam zThe quizzes are closed-book. There are no make-ups. zThe tests are based on material covered in lectures, in-class-work, homework, and textbooks. z The in-class-work will be relevant for the quizzes; The quizzes will be relevant for the final!

13. 13 Class performance zAny attempt to seek favor from the instructor will negatively affect your class performance. zThe instructor cannot assign extra work to any individual to improve her/his grade.

14. 14 Grading zYour available total points will be allocated in the following way: zClass performance 9% zProjects 15% zIn class work 15% (drop 2 lowest) zQuizzes 36%(drop 1 lowest) Final 25%

15. 15 Curve grade A range Top 15% B range Top 55% C range Top 80% D range Top 90% F Bottom 10% zThe instructor reserves the right to make minor adjustment if necessary.

16. 16 Academic integrity zThe instructor has zero tolerance for cheating or looking at each other during the exams. zIn the exams, please sit as far as possible from each other. zIn doing the in-class-work, feel free to discuss with your classmates.

17. 17 Communicate with the instructor zTeaching Style: Lectures and problem solving. Please pay attention to what is covered in class. The textbook may contain more material than required. zI APPRECIATE any constructive suggestions (in person or through email) that would improve the course. The teaching contents could be modified in response to your inputs.

18. 18 Course organization zThis course is broken-down into two parts: z 1: Financial Statements Analysis (analyzing one firm or comparing a few firms: a worm’s view.) z 2: Data Analysis (analyzing a lot of firm’s financials at the same time: a bird’s view.)

19. 19 Why are financial statements important? (1 st part of our course) zManagers use them to monitor and judge firm performance, acquire other businesses. zFinancial analysts use financial statements to rate and value companies. zExternal investors read financial statements to select stocks and decide when to buy or sell. zBankers use them in deciding whether to extend loans and determine loan terms.

20. 20 In this course, we emphasize the perspective of a financial analyst: zUnderstanding clean financial statements zIdentify questionable areas of earnings management zIdentify questionable areas of earnings manipulation zMake necessary adjustments zPut your restated inputs into the frameworks for equity valuation and credit analysis.

21. 21 Why do we need to make adjustments on financial statements? zEarnings manipulation Earnings management Real earnings management No earnings management GAAP

22. 22 Equity Valuation Analysis zDiscounted cashflow models zResidual income model

23. 23 Credit Analysis zZ-scores zZ=1.2 Net Working Capital/Total assets+1.4 Retained Earnings/Total assets+3.3 EBIT/Total assets +0.6 Market Value of Equity/Book Value of Liability+1.0 Sales/Total assets z( Z<1.8 indicates significant bankruptcy risk) zOther models

24. 24 We do not emphasize accounting rules. zA basic knowledge of rules and standards is ok.

25. 25 Why is Data Analysis useful?(2 nd part of course) zBecause you do not believe in semi-strong form of market efficiency. zBecause you can identify variables/ratios that might be relied upon to predict future stock returns. zEarn huge bucks! zAnother eye-catching item on your resume.

26. 26 Combining financial statement analysis and data analysis zAfter identifying several stocks from data analysis, you can apply financial statement analysis to distinguish which one is most attractive.

27. 27 In Data Analysis, zWe will focus on regression techniques. zExample, is there a significant relation between firm investment and future stock returns?

28. 28 One-year-ahead hedge returns based on capital investment levels. ©Donglin Li 2004 z Go long the lowest investment stocks. z Go short the highest investment stocks. z 12 month size adjusted buy and hold hedge returns after May each year. z Positive in 36 out of 39 years, average 12.6% z Pattern is consistent with market mispricing and inconsistent with semi- strong efficiency.

29. 29 Congratulations on enrolling this exciting (and challenging) course!