businessesbecauseof accountingdecisionstheymake.We
developed a number of potential measures of complexity,
ranging from a measure of opacity (developed by Price
Waterhouse) to our complexity score in Appendix 16.2
(developed by asking a series of questions about companies).
Ifwetrustmanagerstobeunbiasedinwhatinformationthey
revealtomarketsandwhentheyrevealthisinformation,we
couldarguethatcomplexitybyitselfisnotaproblemsince
theadditionaluncertaintycreatedisessentiallyfirm-specific
and diversifiable.If,however, managersaremorelikelyto
use complexity to hide unpleasant or bad news (losses or
debt),complexitywillresultinmorenegativesurprisesthan
positiveones.Inthiscase,itisappropriatetodiscountvalue
for complexity. The discounting can occur in one of the
inputsto adiscounted cashflowvaluemodel—cash flows,
growthrates, ordiscountrates—orcantake theform ofa
complexity discount on conventional (unadjusted) value.
It is quite clear that firms should avoid unnecessary
complexity, but the way to ensure this is often not new
legislation or more accounting rules, since they have
unintendedsideconsequences.Instead,investorsandanalysts
needtobecomemoredemandingoffirms.Ifweconsistently
discounted the value of complex firms, we willcreate an
incentiveforsimplerholdingstructuresandmoretransparent
financial statements.
APPENDIX 16.1: STANDARD & POOR’S
TRANSPARENCY AND DISCLOSURE INDEX: KEY
QUESTIONS
Ownership Structure and Investor Rights