--- Chris MACRAE <[EMAIL PROTECTED]> wrote: > I would like to suggest to you that there are 2 poles of corporate > performance which are often opposite: > -a company's last 90 day's performance as a transaction-taker > -a company's performance as a sustainable system for relationship-making
With proper and pure economic accounting, there would be no difference. Short-term gains that incur long-term costs would be fully disclosed. The problem is "creative" or miselading or even fraudulent accounting by which assets and liabilities can be shifted in time or hidden from view. Since purely economic accouting is not done, and indeed is not feasible, then indeed one can induce short-term gains and not disclose, or even know about, the long-term costs. However, I believe that we can go a long way to bring current accounting practices closer to economic reality. An efficient market would discount future gains and costs in line with the prevailing interest rate. So there would be no conflict between short and longer term gains. Each time period would be discounted in accord with how far it is in the future. > Let's assume we have honest bean counting for the last 90 days. It is still > the case that as people in business units squeeze what they can get out of > transactional performance (they may over-sell what after-service can > deliver; they may cut training; they may...) Yes, of course, this is done today. But with proper economic accounting, a cut in training would be offset by extra costs of training or else lower sales in the future. Markets are therefore inefficient to the degree that the data is not fully disclosed or discovered. > Whilst this fundamental contextual bias in "what corporate performance is > defined to be" rules, the chances of markets being efficient dwindles > absolutely below zero. Markets become inefficient when there is fraud and this is not known. When the fraud becomes widely known, or when it is suspected that there is a high systematic probability of fraud, then this is taken into account. An investor will expect to obtain a high risk premium, and correspondingly bid down the price of the asset, just as junk bonds pay higher dividends. There will then be a market for firms that can guarantee honest accounting. Is there an insurance policy available to compensated cheated shareholders? It seems to me that an insurance company would have the incentive to provide honest auditing if it had to pay the insured customers for any fraud. Fred Foldvary ===== [EMAIL PROTECTED]
