Final answer:
It is true that understanding financial statements and evaluating a firm's performance require more than personal knowledge of managers. Information on a company's products, revenues, costs, and profits becomes increasingly critical as the firm grows. This allows investors to make informed decisions even without personal connections to management.
Step-by-step explanation:
It is true that additional information beyond personal knowledge of a firm's managers is critical to understanding financial statements and evaluating a firm's performance. As a firm grows and establishes its presence, the need for personal knowledge of managers becomes less significant. This is because more information is made available to outside investors about the company's products, revenues, costs, and profits, allowing bondholders and shareholders to make informed decisions without having a personal relationship with the firm's managers.
Imperfect information, where not all market participants have equal information, can play a crucial role in how firms choose between sources of financial capital.
The more established a firm, the more independent it can be from the need for investors to assess its managers on a close, personal level, focusing instead on its financial disclosures. In turn, the willingness to invest capital into the firm by outside investors like bondholders and shareholders is based on the wider availability of financial data and information.