>>>> All well and good for a company whose records make clear their inherent soundness. But if your financials are in disarray, would there not still exist the same comparative advantage to APPEAR open and honest while surreptitiously cooking the books? >>>>
Sure. But don't laws requiring openess make the market for honesty less necessary- people already want security in their investments and laws requiring honesty take this quality out of the market. And might faking honest records be more costly than just showing the records you have- finacial documents must be altered, secrets must be kept, perhaps insiders paid off, you still have to pay for some kind of fascade to look like an actual business, etc? And the business is gone once the scam is found out- it is very risky and probably won't last long. So there can be a considerable advantage to being honest in the first place- even if you only appear as honest as the dishonest.(--Just saw that JP said this too.) Also, I am trying to say that with a law saying they "have" to be honest people may take this for granted and not really know when a company is or isn't being honest. Without the law requiring honesty, people may have more incentive to want to make sure the company is honest- not just pretending. If everyone were honest, you would invest little time in checking their books. If only a minority of firms were honest, you would invest a good deal of time in checking their books. What is the reason to say that without laws requiring it, cheating would be easier? People would no doubt cheat more if they wouldn't get caught, but if honesty, like an automobile, is what consumers (or in this case investors) value, then why won't the market provide it? I think that it will- hence such things as Consumer Reports and auditors. Why is honesty or information different then any other product or quality of a product? Where is the market failure? Are investors who would rather take the gamble on a company with no financial records being hurt? Jason
