Dissertation on "Evaluating the Chosen Companies"

Dissertation 36 pages (9987 words) Sources: 30

[EXCERPT] . . . .

Competition Between McDonald's, Burger King, and Wendy's: The Finances of Fast Food

The following research proposal demonstrates the need for achieving greater consistency, accuracy, and reliability in the financial assessment of public traded corporations, and to this end develops a systematic way of achieving a model of prediction and assessment with the qualities. Noting the recent and ongoing economic turbulence caused by inconsistent and often fraudulent accounting and reporting practices, a literature review is conducted that identifies many of the complicating factors that affect financial reporting and corporation value assessment even when entirely legitimate practices are involved. Issues affecting firm valuation and company performance are also assessed. Following this review, the methodology for the proposed research of three companies in the fast food industry is presented, containing a mix of quantitative and qualitative data and methods.

Introduction

As dry and academic as accounting might seem to the average person, the preparation and publication of financial documents has actually led to headline-making news multiple times throughout the last several decades. From the series of financial and accounting scandals at Enron, WorldCom, and Tyco in the first years of the new millennium to the more recent global economic recession brought about by nefarious banking and lending practices at some of the world's leading financial institutions, the understanding and analysis of financial and accounting documents has proven itself time and time again to be of immense practical relevance and importance to every member of society in manners heretofore unimaginable. The financial strength of a company, an industry, and an economy as a whole is directly related to the quality of life the stakeholders in these bodies can experience, and when information is improperly understood, incorrectly displayed, or outright falsified, serious consequences occur for these stakeholders.

There are also still the more mundane and standard uses of these financial documents, of course, such as examination by institutional and individual investors to determine what areas of investment might lead to the greatest level of wealth creation and the most efficient returns on investments. Even in such applications, however, the need for increased scrutiny and care in the examination of these financial documents and their implications in a broader context of competition and industry performance has been highlighted by these financial scandals and breakdowns. Examining any company's financial position must include an assessment of its actual identifiable sales performance and real operations, and should generally include an assessment of competitor's financial and performance positions in order to contextualize and validate the statements and assessments made in annual reports and other publications. It is no longer enough, in other words, to simply take a company's word for its past and current performance, let alone its future projections of growth and profit. Instead, a broad array of tools and objective -- even skeptical -- perspectives must be brought to bear on the examination of any company.

The research proposed herein would work towards adopting a model for such inspection in the highly competitive quick-service restaurant (i.e. "fast food") industry. By examining financial statements and other publications produced by three of the industry's top competitors -- McDonald's, Burger King, and Wendy's -- produced over the past decade and comparing these internal assessments and projections with actual performance and with objective third-party analyses produced over the same period, a determination of accuracy, correlation, and context can be developed that will lead to a more comprehensive and valid interpretation of company-produced financial documents. In other words, this research will attempt to develop a model for financial document assessment in the context of external analyses as a means of developing better practical tools for investors, regulators, analysts, and the public at large in determining the strength of companies, industries, and economies. The following pages contain a brief literature review covering similar attempts and specific research areas of importance to the development of the research question at hand, as well as a methodological outline for the proposed research.

Literature Review

The idea that financial management and its implications for company and industry performance are complex and often nebulous at best is not new, and the vagaries and inconsistencies of certain concepts as they are understood and applied is a standard part of academic study in the area (Brigham & Erhardt, 2010). This does not mean that research into the area is complete, however, or that the current nebulous areas of financial management could not be brought into the light and made more concrete if there was real desire and effort to do so; understanding the actual machinations of financial management, financial reporting, and the growth of productivity and profit is essential from practical as well as academic viewpoints, and the problems should be addressed as such (Brigham & Erhardt, 2010). It is with precisely this dual goal of academic and pragmatic process that this research is being undertaken, and there are solid theoretical and practical foundations for such an investigation (Brigham & Erhardt, 2010).

Part of the problem experienced in the current era when it comes to the reasonable, accurate, and relevant analysis of financial statements and positions is the growing complexity of the financial tools and transactions that companies and investors utilize. This is made quite clear in an examination of the relationship between credit default swaps, bond markets, and stock prices, that finds a very complex and not always directly correlative relationship between these elements, all of which can be seen in various ways as market expectations regarding a company's strength and performance (Norden & Weber, 2009). The lack of consistency and correlation between these elements depending on the companies, industries, and markets selected for research -- and even within individual companies, industries, and markets -- is a clear and definite indicator that financial and investment analysis is a highly inexact science in need of more direct and comprehensive assessment if there is hope of gaining more stability and certainty through such assessments (Norden & Weber, 2009). The complications and uncertainties evidenced in such things as credit default swap trading and its relation to bond and stock markets are exacerbated by current research into basic macroeconomic assumptions that demonstrate current models of price, competition, and production might be fundamentally flawed, with operational capabilities and profits regularly directly contravening expectations based on the models (Carlin, 2009). This could suggest that an entirely new model of value and profit creation needs to be developed and adopted before the wider implications of more specific financial analyses can be made meaningful (Carlin, 2009).

What all this means for those trying to ascertain practical recommendations via financial analysis is, of course, a decrease in the reliability and the validity of projections binge made. The increasing complexity and unpredictability (at last according to current models, frameworks, and theories) of financial analyses based on company-produced reports, statements, and on industry and market movements can make it difficult if not impossible to determine what effective purchases and solid investments might be without a great deal of resource intensity (Barber et al., 2010). A comparison of individual and institutional investment performance in the Taiwanese stock market, for example, found that individual investors tended to have a three-and-a-half percent performance decrease as the result of aggressive and ill-informed trading, while institutions received a one-and-a-half percent performance boost as a result of the greater level of resources and scrutiny they are able to provide for each trade (Barber et al., 2010). While it will always be the case that those with more resources and skills for analysis will perform better analyses and that institutions will necessarily have more of these at their disposal than individual investors, it is also the case that a better-informed public would be able to make better decisions based on less simplistic and/or inaccurate modes of assessment. Furthermore, despite the negative nature of these findings, they also suggest that there is a definite means of appropriately and reliably assessing true strengths and performance capabilities of companies through comprehensive analysis; though investment institutions tend to perform such analyses on a case-by-case basis, the fact that these institutions have consistent performance improvements leads to the conclusion that a model could indeed be developed to align analytical tools with real past and projected performance (Barber et al., 2010).

In the fast food industry, an additional complicating factor is added to financial analysis, stock price analysis, and real performance projections -- brand recognition. Individual investors tend to be inordinately and irrationally attracted to headline-grabbing and other recognizable companies regardless of true performance capabilities (Barber & Odean, 2008). These behaviors have an effect on stock prices directly, and indirectly on the reporting of financial data and the making of internal projections about performance, and thus can have a real effect on competition (Barber & Odean, 2008). The three fast food companies listed are incredibly recognizable due to aggressive advertising campaigns and near-ubiquity throughout much of the developed world, and this will influence the model constructed for in-depth and accurate analyses and comparisons of these competitors.

Not only is the development and construction of… READ MORE

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