Final answer:
Financial performance information such as profit and loss is essential for stakeholders, including bondholders and shareholders, especially as a firm becomes more established and its future profitability becomes more certain. These financial metrics help external investors make informed decisions due to the imperfect information available between business insiders and outside investors.
Step-by-step explanation:
Information about the business's financial performance, such as profit and loss, is crucial for various stakeholders. As a firm develops and its strategy demonstrates the potential for future profits, the necessity for stakeholders to know the individual managers and business plans diminishes. Instead, the focus shifts to more objective measures of the company's health, like financial performance indicators, such as revenues, costs, and profits. This availability of financial data plays a critical role in securing financial capital from external investors, like bondholders and shareholders, who may not have personal knowledge of the managers. They rely on this information to make informed decisions about investing in the firm.
The patterns in how businesses raise financial capital can often be explained in terms of imperfect information, a situation where there's an asymmetry in the knowledge possessed by the buyers and sellers in a market. The insiders of a firm typically know more about the company's potential to generate profits than external sources of financial capital. Consequently, these outsiders need accurate financial reporting to bridge the knowledge gap and make prudent investment decisions. This is especially important during periods when a company might not be generating enough profits and requires stable sources of financial capital to continue operating and investing for future growth.