CHAPTER 16
The Value of Transparency
When valuing firms, we draw on financial statements for
information and trust these statements to provide us with
reliabledataon whata firmearns,what itowns,and how
muchitowes.Notallfinancialstatements,though,arecreated
equal,andsomeareclearlymoredifficulttoworkwith(from
avaluationperspective)thanothersfortworeasons.Oneis
accountingmalpractice,wherefinancialstatementswithhold
relevant and material information or provide incorrect
informationabout thefirm. Theblame for misleadingand
incompletefinancialstatementsdoesnotnecessarilyliewith
theregulatoryauthorities,andtighteningdisclosurelawswill
notmaketheproblemgoaway.Theotherreasoniscorporate
complexity. Even with equally informative financial
statements,somecompanies areeasiertovaluethanothers
simply because they are less complicated; Wal-Mart is a
much easier company to value than General Electric.
In this chapter, we consider whether the complexity of a
companyshouldhaveaneffectonitsvalue.Toanswerthis
question, we begin by discussing why complexity might
matter to investors and then examine two much thornier
questions:Whatisitthatmakesacompanycomplex?And
how do we measure complexity? We then consider the
empirical evidenceon how investors dealwith complexity
whenvaluingcompanies.Weclosethechapterbylookingat
ways in which we can incorporate complexity into both
discounted cash flow and relative valuations.