« A reflective mindset | Home | Parallen Weinbau und Management »

13.07.05

Creating value or profits

In a paper entitled ’The Economic Implications of Corporate Financial Reporting’ the authors (Grahama, Harveya, and Rajgopal) present and discuss a survey indicating key factors that determine performance measurement and voluntary disclosure of corporate information. They state that:
’We find that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter’s consensus earnings. Similarly, more than three-fourths of the surveyed executives would give up economic value in exchange for smooth earnings. Managers believe that missing an earnings target or reporting volatile earnings reduces the predictability of earnings, which in turn reduces stock price because investors and analysts dislike uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but at the same time, try to avoid setting a disclosure precedent that will be difficult to maintain.’

This finding should alarm any shareholder that has major stocks in one of the surveyed companies. However, I believe that this is not restricted to the surveyed companies but generally prevails in the top-management decision making processes. This is really worrying. Though there are two issues in the above statement, let me separate them: the first one is about creating value for an organisation, the second issue is about disclosure of information. Starting with the first topic, it seems that managers rather satisfy short-term results in stead of investing in long term cash-flow generating opportunities. This practice has its origin in the US, but Europe followed this practice. However, not to the full extent. Companies are already retreating from NYSE due to the quarterly pressure for positive results. This decision may become a major advantage for European companies in the near future.

The second addressed issue is the disclosure of information. Of course, many factors need to be taken into consideration (such as information asymmetrie, agency theory, efficient market hypothesis etc), but the point I want to make is in connection with intangible assets. Eli Amir and Baruch Lev found out that
’Analysts’ incremental contribution over financial reports is indeed larger in intangibles-intensive companies than in companies with low levels of intangibles, indicating that the much-discussed intangibles-related financial report deficiencies are partially compensated for by other information sources.’ and
’However, while we document that analysts compensate for some intangibles-related financial report deficiencies, it is evident that this compensation is far from complete, particularly in certain important industries that we identify.’

Apparently, intangibles-intensive companies need find ways to compensate the lack of information regarding non-tangibles. Unfortunately, there is no standard reporting technique available that provides a basis for benchmarking. What is available are different firm-specific (monetary and non-monetary) intangible reporting methods such as the Intangible Asset Monitor, Skandia Navigator, Tobin’s q’s-q etc. But these are not consistent with respect to corporate valuation. To progress with stringent intangible asset valuation is is one of the interesting fields of research and work for the coming years.

You may wish to leave a from your own site.