Disclosures: Is Less More?
Public company filings continue to lengthen thanks to growing ‘disclosures. In a recent blog post, NYU Professor Aswath Damodoran argues that this clutter has the effect of obscuring what is ultimately the most important and pertinent information and, as a result, reduces the value of these overall reports. We would expand his points with the idea that clear, concise, and focused disclosures often identify fair-minded, shareholder-friendly management teams.
So, what gives here? Why have these increased disclosure requirements not worked the magic that they were supposed to? While we can point to lots of reasons, including imperfections in the disclosure requirements, I think that the biggest problem is that the disclosure rules have turned financial disclosures into data dumps. To see my point, take a look at the 10K for a publicly traded company, even a small one, and you will see a document that runs into tens or even hundreds of pages… Faced with information overload, it is easy to get distracted by the legal boilerplate (you might as well throw out the entire section that discusses risk) and the trivial details that clutter modern disclosures. n my estimate, less than 10% (and that is being generous) of a modern financial disclosure has any value to an investor…
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While I am sure that I will be ignored, here are my suggestions to the regulatory and accounting disclosure czars if they truly want to help investors:
- Focus on principles, not rules
- Less is more
- Target investors, not lawyers
- Let accountants do accounting (and not valuation)