My former Congressman (Dick Armey)
once called him Barney Fag, so somehow I don't think that he would come
down here any time soon. So someone else will have to take him. ;-)
David
"There
is no virtue in compulsory government charity, and
there is no virtue in advocating it. A politician who portrays himself
as
"caring" and "sensitive" because he wants to expand the
government's charitable programs is merely saying that he's willing to
try to
do good with other people's money. Well, who isn't? And a voter who
takes pride
in supporting such programs is telling us that he'll do good with his
own money
-- if a gun is held to his head."--P.
J. O'Rourke
In a message dated 7/11/2009 3:27:04 P.M. Pacific Daylight Time,
[email protected] writes:
Definitely in government. Of
course, I'm not sure that career liars can come clean. Take Barney
Franks, please. :-)
David
"There
is no virtue in compulsory government charity, and there is no virtue
in advocating it. A politician who portrays himself as "caring" and
"sensitive" because he wants to expand the government's charitable
programs is merely saying that he's willing to try to do good with
other people's money. Well, who isn't? And a voter who takes pride in
supporting such programs is telling us that he'll do good with his own
money -- if a gun is held to his head."--P. J. O'Rourke
The calls for full disclosure
grow with every accounting scandal. The domino-like procession of Worldcom, Enron and Tyco
brought manipulative accounting to the forefront for the first
time, and prompted calls for legislation and accounting reforms all
aimed at forcing corporations to make frank and full disclosure in
their financials. The question is whether full disclosure is the answer
to existing problems and what impact it would have on the market.
(Learn more about post-Enron Wall Street by reading Lady Godiva Accounting
Principles.)
Practical
Limitations There are "natural" limitations to the term "full
disclosure". The primary limitation is that full disclosure would be
defined and enforced by legislation. No matter how carefully a document
is drafted, there will be room for companies to do the bare minimum.
There are already companies that willingly disclose much more than what
is required by law. Usually, these are the companies with strong
management holding a majority position and thus risking nothing by
telling the truth.
Take Warren Buffett's
letter to the shareholders in which he admits to losing millions by
acting slowly on closing the trading arm of Gen Re, Berkshire
Hathaway's wholly owned subsidiary. Buffett is honest, but he is also
not likely to be fired because he controls a majority stake of
Berkshire.
On the other hand, management with no significant stake in the company,
that is management working for the wage, will still be motivated to
find ways to mute any bad results to the extent that the law allows.
While it would be refreshing for a company to state what challenges it
faces and what worries it has rather than simply presenting a glossy
fairytale to investors peppered with enthusiasm, this type of
disclosure will continue to be a personal choice of management - you
can't legislate honesty. (Don't get fooled by these releases full of
company ruses. Read Five Tricks
Companies Use During Earnings Season.)
Realistic Numbers and Their Source The best one can hope for from full disclosure is to end
the use of deceptive footnoting to
hide important information and to ensure a more in-depth assessment of
costs, investment risks, and so on. It's unlikely that a company could
be legislated into disclosing its unquantifiable anxieties like looming
labor problems or a lack of new areas for growth. Still, any additional
information helps. (For more on this, see Footnotes: Start
Reading The Fine Print.)
A clear explanation of the way firms calculate the risk of an
investment went a long way toward heading off the toxic mortgage assets
that companies were piling into based on overly sunny assessments. In
short, full disclosure would simply mean more numbers to work with.
Culling Analysts One of the most noticeable effects of full disclosure
would be increased pressure on analysts. With more information made
public as it occurs, much of the attraction of whisper numbers would
vanish. The simultaneous release of information to the public under Regulation Fair Disclosure
(Reg FD) has already made analysts' jobs more difficult. Ironically,
some believe Reg FD may actually limit disclosure in the sense that
businesses may speak less freely with analysts for fear of violating
the rule. Rather than removing analysts as information brokers and
leveling the playing field, Reg FD may actually choke off an important
information source. In a market with less substantial information,
earning surprises and quarterly volatility could increase.
Even with true full disclosure, however, the fact-rooting analysts are
necessary. To stay in business under full disclosure, analysts will
have to make meaningful reports rather than relying on the information
lag between Wall Street and average investors. (Thinking about relying
on analyst recommendations for your next trade? First, check out What To Know About
Financial Analysts.)
In the past, analysts have benefited merely from being on the dial for
conference calls or able to tap other informal information sources.
There will still be an important role for good analysts, namely those
whose understanding of an industry allows them to condense vital
information into time-saving and accurate reports for investors. Full
disclosure would simply up the natural selection for analysts that are
squeaking by on an information edge today.
Rewarding Honesty One of the possible positive effects of full corporate
disclosure would be a lower cost of capital
as a reward for honesty. With companies laying their balance sheets
bare, lenders would be able to assess the risks more accurately and
adjust their interest rates to match. Lenders usually add to the interest rate
on a loan as a margin of safety against undisclosed risks.
The size of this margin varies naturally from industry to industry, but
more complete disclosure by companies would allow them to differentiate
themselves from other companies. Companies with strong balance sheets
would have a cheaper cost of capital and those with weak balance sheets
pay more as a matter of course. Companies attempt to do this on their
own but banks are understandably skeptical from experience. Of course,
banks may continue to charge a premium simply because even the
strictest legislation will leave room for weak companies to hide. (To
learn more about a company’s balance sheet, check out Breaking Down The Balance
Sheet.)
Inundating Investors One of the big questions about full disclosure is
whether it would actually help the average investor. The impact of full
disclosure depends on the type of investor. Momentum traders
care little for deep info, whereas value investors
constantly seek more meaningful numbers. Surprisingly, one of the great
value investors, Ben Graham, lamented disclosure because he believed it
made it harder to find undervalued companies before the general market.
Would full disclosure kill value investing?
This is highly unlikely for the same reason that full disclosure
wouldn't kill momentum trading. Even with full disclosure, the market
would be moved to extremes by funds, trend chasers/traders, investor
overreaction and so on. If anything, full disclosure would make it
easier for investors to make certain that what appears to be a value
play truly is one. Working with more detailed numbers, an investor
would be able to create customized metrics rather
than depending on blunt instrument like P/E and P/B ratios.
For a mathematically inclined investor, full disclosure would be a
blessing.
It's the emotional investors that would pay a price for full
disclosure, and all investors are emotional at times. For many, less
information is an advantage because a deluge of information often leads
to overload. More figures and more frequent reporting/press releases
will no doubt lead to some investors second-guessing their investments
and selling on market reactions rather than fundamental changes. These
investors will have to learn to depend only on the financial reports
and not the increased drone of financial news releases.
The Bottom Line Full disclosure has a lot of possibilities, including
decreased cost of capital, pressure on analysts and more realistic
financials, but it may not be the solution for all investors. Even with
partial disclosure, investors can easily be drowned in information. To
make the most of full disclosure, investors need to become educated in
investing theory to know what information they should be demanding to
fit a given technique.
You may find that the information is already there for the asking with
most companies and, if not, perhaps the company isn't the investment
you want. By rewarding, that is investing in, companies that
voluntarily disclose more than necessary, and not in companies that do
the bare minimum, you'll be casting your small but important vote in
favor of fuller disclosure. Investor pressure for frank disclosure will
do more to promote honesty in the stock market than any legislative
change. (To learn more, check out Disclosures: The Good,
The Bad, And The Ugly.)
Andrew Beattie is a freelance
writer and self-educated investor. He worked for Investopedia as an
editor and staff writer before moving to Japan in 2003. Andrew still
lives in Japan with his wife, Rie. Since leaving Investopedia, he has
continued to study and write about the financial world's tics and
charms. Although his interests have been necessarily broad while
learning and writing at the same time, perennial favorites include
economic history, index funds, Warren Buffett and personal finance. He
may also be the only financial writer who can claim to have read "The
Encyclopedia of Business and Finance" cover to cover.
** This article and more are available at
Investopedia.com - Your Source for Investing Education **
