Information transparency and valuation: can you value what you cannot see?

Abstract

Purpose

It is clear that some firms are more forthcoming about their financial affairs than others, and that the financial statements of some firms are designed to obscure rather than reveal information about the firms. How does one reflect the transparency (or the opacity) of a firm's financial statements in its value? This paper aims to examine both the sources of complexity in financial statements and the appropriate responses in valuation.

Design/methodology/approach

The paper examines both the sources of complexity in financial statements and the appropriate responses in valuation.

Findings

The paper develops a number of potential measures of complexity, ranging from a measure of opacity (developed by Price Waterhouse) to a complexity score (developed by asking a series of questions about companies).

Practical implications

If the value of complex firms is consistently discounted, an incentive for simpler holding structures and more transparent financial statements will be created.

Originality/value

While investors and analysts may increasingly bemoan the increasing complexity of financial statements, there is no simple measure of complexity. This paper considers some ways in which the complexity of a firm's financial statement can be measured.

Citation

Damodaran, A. (2007), "Information transparency and valuation: can you value what you cannot see?", Managerial Finance, Vol. 33 No. 11, pp. 877-892. https://doi.org/10.1108/03074350710823836