1 Since the firms havesimilar risk exposure and financial
leverage,theyshould havethe samecost ofcapital. Since
theirreturnoncapitalisequal,theywouldalsohavethesame
reinvestmentratesandfreecashflowstothefirm.Thelackof
transparency would be considered diversifiable risk and
would not affect the cost of capital.
2 E. Berglofand A.Pajuste,“WhatDoFirms Discloseand
Why?EnforcingCorporateGovernanceandTransparencyin
Central and Eastern Europe,” working paper, SSRN, 2005.
3 Thisisadirectconsequenceofthefactthatmoneyspenton
research and development is expensed in the year of the
expenditure,eventhoughitisreallyinvestmentforthefuture
(i.e.,capital expenditure,which should be spread out over
time).
4 Mostretailstoreleasesareoperatingleasesandaretreated
asoperatingexpensesintheUnitedStates.OutsidetheUnited
States, almost all leases are treated as operating expenses.
5 Evenatexercise,firmsusedifferentpracticestoreflectthe
exercise of options. Some show the exercise value as
expenses,whileothersmaketheadjustmentstobookequity
inthebalancesheet.Thereissomehope,though,thatsanity
willprevail.Startingin 2006,FASB123Rwillrequirethat
options be valued and expensed at the time that they are
granted.
6 With pooling, firms can add up the book values of the
acquiringandacquiredfirmandreportthetotalasbookvalue
forthecombinedfirm.Thepremiumpaidoverbookvalueis
ignored. In purchase accounting, the premium over book