Applications

Abstract

Applications are not a major topic, to say the least, in studies that adhere to the theory of finance and if applications are included at all, their relation with the preceding theoretical analyses is generally a very loose one. As Tempelaar (1985) points out, many textbooks on finance start with rigorous analyses in the neoclassical framework, but the applications later on are usually confined to qualitative recommendations or checklists that have little to do with the foregoing arguments in the MM-tradition. The opposite can be observed in the practice of (small) business finance. The traditional financial statement analysis produced an enormous amount of rules of thumb, ratio pyramids, index systems, scoring models, discriminant models, etc., some of which are extensively used in practice but in which theoretical developments are virtually ignored. Attempts to bridge the gap between modern finance theories and traditional financial statement analysis have been made (e. g. Lev, 1974), but theory and practice still seem to be largely separate areas of inquiry.