Abstract

http://ssrn.com/abstract=886836
 
 

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The Value of Transparency and the Cost of Complexity


Aswath Damodaran


New York University - Stern School of Business

January 2006


Abstract:     
It is clear that some firms are more forthcoming about their financial affairs than other firms, and that the financial statements of a few firms are designed to obscure rather than reveal information. While differences in accounting standards across countries was viewed as the primary culprit for this lack of transparency until recent years, the convergence in accounting standards globally has made it clear that no matter how strict accounting standards are, firms will continue to use their discretionary power to spin and manipulate the numbers that they convey to financial markets. The questions we face in valuation are significant ones. How do we reflect the transparency (or the opacity) of a firm's financial statements in its value? Should we reward firms that have simpler and more open financial statements and punish firms that have complex and difficult-to-understand financial statements? If so, which input in valuation should be the one that we adjust? This paper begins by examining the phenomenon of opacity in financial statements and why some firms choose to be opaque. It follows up by considering some of the empirical evidence on whether markets discount the value of complex firms to reflect the difficult faced in valuing them. It closes by evaluating some of the ways in which we can adjust discounted cash flow valuation models for this difficulty.

Number of Pages in PDF File: 47

Keywords: transparency, opacity, complexity, valuation

JEL Classification: G12, G34

working papers series


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Date posted: March 6, 2006  

Suggested Citation

Damodaran, Aswath, The Value of Transparency and the Cost of Complexity (January 2006). Available at SSRN: http://ssrn.com/abstract=886836 or http://dx.doi.org/10.2139/ssrn.886836

Contact Information

Aswath Damodaran (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.damodaran.com
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