Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Venezuela 63 27

In an alternate measure of the cost of complexity, Price
Waterhousemeasuredthedefaultspreadonsovereignbonds
issuedbycountriesovertheU.S.Treasurybondandargued
that this was a cost of complexity, since more complex
companies tended to have much lower bond ratings and
higherdefault spreads.TheKurtzmanGroupquantifies the
opacityeffect asapremiumoradiscountrelativetodoing
business in the United States. In their 2004 survey, for
instance,theyconcludethattheadditionalopacityofdoing
businessin Indonesiawouldrequirean annualpremium of
8.54percent.(Ifyournormalcostofcapitalis 9 percent,you
would demand 17.54 percent in Indonesia.)

Asfurtherevidencethattransparencydoesmatter,Gelosand
Wei (2003) note that institutional investors invest less in
companiesthatoperateinlesstransparentcountriesandthat
they flee investments in these countries far more during
crises.
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Conglomerate Discount

Inthepasttwodecades,evidencehassteadilymountedthat
markets discount the value of conglomerates relative to
single-business (or pure play) firms. In a study in 1999,
Villalongacomparedtheratioofmarketvaluetoreplacement
cost(Tobin’s Q)fordiversifiedfirms andspecializedfirms
andreportedthattheformertradedatadiscountofabout 8
percent on the latter.
21 Similar results were reported in earlier studies.
22