- Asinthecaseofdiscountedcashflowvaluation,we
coulddoaconventionalrelativevaluation(with no
adjustment for complexity) and then discount the
relative value for the complexity of thefirm. The
adjustment process wouldmirror that used for the
discounted cash flow value.
Asfirmsbecomemorecomplex,relativevaluationbecomes
much more difficult across the board since we need
comparable firms with market prices to estimate the
appropriatemultiples.Afterall,whatfirmistrulycomparable
to GE or Citigroup?
CURES FOR COMPLEXITY
Topreservetheintegrityoffinancialmarkets,wemustpush
to makethefinancialstatementsoffirmsboth truthfuland
transparent.Inthissection,weconsidersomeofthewaysin
which we can make this a reality.
Legislation
IntheaftermathofaccountingscandalsintheUnitedStates,
legislation has inevitably followed. After the Great
Depression and evidence of financial skulduggery, the
Glass-Steagall Act was passed restricting banks from
investment activity, and the Securities and Exchange
Commissionwascreatedtoregulatethetradingofsecurities.
Intheaftermathofthecollapseofthesavingsandloansinthe
1980s,wesawincreasedregulationoffinancialservicesfirms
ingeneral.Thelatestcrisisinaccounting,precipitatedbythe
implosion of Enron, hasresulted in new laws designedto
preventarecurrence.Whilethemotivationforlegislationis