Operating and Business Concerns
Forsome firms, at least,there arereal costs to disclosing
moreinformationtofinancialmarkets.Competitorsmayuse
theinformation to fine-tune theirstrategies and employees
andcustomersmayrespondnegativelytotheinformationin
financialstatements,especiallywhenthefirmisinfinancial
trouble.Infact,thereisthepossibilitythattheperceptionthat
afirmisintroublecancreateadeathspiral,wherecustomers
stopbuyingthefirm’sproductsandemployeesabandonship,
thuscreatingevenmorefinancialtrouble,untilitbecomesa
self-fulfilling prophecy. In Chapter 6, we discussed this
phenomenon in the context of indirect bankruptcy costs.
The potential negative effects of more disclosure (and
transparency)havebeenexaminedinAlamazan,Suarez,and
Titman (2002).
16 Theyarguethatmoretransparencycanreducefirmvalue
whenindirectbankruptcycostsarehigh.Theynotethatfor
some firms, increasing transparency may result in more
conservative capital structures, less reliance on external
funding, and a turningaway ofpositive net present value
investments.Theyarguethattechnologyfirms,inparticular,
canbehurtbymoretransparencyinfinancialstatements.We
have little sympathy for this argument, since these firms
chosetoaccesspubliccapitalmarketsforadditionalfunds.In
return for the access to capital, they have undertaken to
provideinformationtoinvestors. Iftheyfeelthat thecosts
exceedthebenefits,theycanalwaysgobacktobeingprivate
businesses.
Deceit