Financial Statements
and Data Analysis
(FIN357)
Administrative Issues and Course Overview
TIP
If you do not understand
something,
ask me!
The instructor
 My name is Donglin Li.
 Email: donglinli2006@yahoo.com,
donglin@sfsu.edu
)
or
 Office hours: Mon 14:00-17:00, Tu 13:00-14:00, Bus 315
http://online.sfsu.edu/~donglin/courses.html
 Research interest:
Corporate finance: Agency cost, overinvestment
Accounting: Financial Statement Analysis, Market
Anomalies
Credit Risk Analysis
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My expectation in this course
I want everyone in the room to be able
to
understand fundamental financial statements
identify potential areas of earnings
manipulation and earnings management and
make necessary adjustments
carry out basic valuation analysis and credit
analysis
master a set of statistical tools that will help
you identify the relation between some
accounting variables/ratios and stock returns.
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My experience
students who come to classes, listen, do
problems, do projects, take tests, review the
issues, and think, usually do well.
students who do not come to classes
typically do poorly.
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Textbooks
“Financial Statement Analysis: A Global
Perspective” By Robinson, Munter, and
Grant, Pearson/Prentice Hall.
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Prerequisite
FIN350 with a grade of C- or better and
ISYS 263 or pass computer information
system proficiency test.
In addition, you should have a good
knowledge of financial accounting and
statistics.
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For the 2nd half course,
you may use any statistics/econometrics
textbook that you are familiar with. The
textbook should cover regression analysis.
 “Analysis of Financial Data”, By Gary Koop, John Wiley
 “Introductory Econometrics with Applications” By Ramanathan, 5e,
South-Western.
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Add, drop and withdrawal policy
The business school has the policy for
add, drop and withdrawal
In the first four weeks, you have to get
enrolled in the class, if you want.
Students can withdraw at most once.
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Homework
The best way to learn new concepts is to
work through some problems. The
solution will be posted on my web.
I will also put lecture slides and in-classwork on my web.
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Projects
You need to work independently on the 2
projects.
You need to have access to a PC.
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In-Class-Work
There will be 5 in-class work assignments.
The 2 lowest in-class-work scores will be
dropped.
The schedule of these in-class projects will
not be announced in advance, so just
come to the lectures.
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The quizzes and final exam
The quizzes are closed-book. There are no
make-ups.
The tests are based on material covered in
lectures, in-class-work, homework, and
textbooks.
The in-class-work will be relevant for
the quizzes; The quizzes will be relevant
for the final!
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Class performance
Any attempt to seek favor from the
instructor will negatively affect your class
performance.
The instructor cannot assign extra work to
any individual to improve her/his grade.
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Grading
Your available total points will be allocated
in the following way:
Class performance
9%
Projects
15%
In class work
15% (drop 2 lowest)
Quizzes
36% (drop 1 lowest)
Final
25%
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Curve grade
A range Top 15%
B range Top 55%
C range Top 80%
D range Top 90%
F
Bottom 10%
The instructor
reserves the right to
make minor
adjustment if
necessary.
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Academic integrity
The instructor has zero tolerance for
cheating or looking at each other during
the exams.
In the exams, please sit as far as possible
from each other.
In doing the in-class-work, feel free to
discuss with your classmates.
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Communicate with the
instructor
Teaching Style: Lectures and problem solving.
Please pay attention to what is covered in class.
The textbook may contain more material than
required.
I 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.
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Course organization
This course is broken-down into two parts:
1: Financial Statements Analysis (analyzing
one firm or comparing a few firms: a worm’s
view.)
2: Data Analysis (analyzing a lot of firm’s
financials at the same time: a bird’s view.)
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Why are financial statements
important? (1st part of our course)
Managers use them to monitor and judge firm
performance, acquire other businesses.
Financial analysts use financial statements to rate
and value companies.
External investors read financial statements to
select stocks and decide when to buy or sell.
Bankers use them in deciding whether to extend
loans and determine loan terms.
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In this course, we emphasize the
perspective of a financial analyst:
Understanding clean financial statements
Identify questionable areas of earnings
management
Identify questionable areas of earnings
manipulation
Make necessary adjustments
Put your restated inputs into the frameworks for
equity valuation and credit analysis.
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Why do we need to make adjustments
on financial statements?
Earnings manipulation
GAAP
Earnings management
Real earnings management
No earnings management
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Equity Valuation Analysis
Discounted cashflow models
Residual income model
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Credit Analysis
Z-scores
 Z=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<1.8 indicates significant bankruptcy risk)
Other models
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We do not emphasize
accounting rules.
A basic knowledge of rules and standards
is ok.
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Why is Data Analysis useful?(2nd
part of course)
Because you do not believe in semi-strong
form of market efficiency.
Because you can identify variables/ratios
that might be relied upon to predict future
stock returns.
Earn huge bucks!
Another eye-catching item on your
resume.
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Combining financial statement
analysis and data analysis
After identifying several stocks from data
analysis, you can apply financial
statement analysis to distinguish which
one is most attractive.
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In Data Analysis,
We will focus on regression techniques.
Example, is there a significant relation
between firm investment and future stock
returns?
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One-year-ahead hedge returns based on capital
investment levels. ©Donglin Li 2004
1 year ahead hedge returns between lowest and highest deciles of investment (d_PPE) firms
 Go long the lowest investment
stocks.
0.35
 Go short the highest investment
stocks.
0.3
0.25
 12 month size adjusted buy and
hold hedge returns after May each
year.
Hedge Portfolio Return
0.2
0.15
 Positive in 36 out of 39 years,
average 12.6%
0.1
0.05
0
1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-0.05
-0.1
 Pattern is consistent with
market mispricing and
inconsistent with semistrong efficiency.
Year
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Congratulations on enrolling
this exciting (and challenging)
course!
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