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Consequences unreliable annual reports on value creation?

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What are the consequences unreliable annual reports have on value creation?

 

Accounting systems (annual reports) fail to reliably measure the economic value of firmsand in particular the status of intellectual capital / intangible assets. The consequences of this on value creation processes are quite severe:

  • Information asymmetry between those who do know about the status of intangibles in a company and those who donít. This in turn results in:

  • Abnormal gains to informed investors and abnormal losses to those who are not or poorly informed (outside investors)

  • The more intangibles-intensive a company is, the bigger the asymmetry can become. As a result, the volatility of firmís stock values will increase.

  • Decreased investorsí confidence in the integrity of capital markets.

  • Increasing bid-ask spreads (the price differential that traders and market makers are willing to quote for buying or selling a security will increase as a form of self-protection of the traders against asymmetric informed investors).

  • Bigger bid-ask spreads will lead to decreased volumes of trade (each buy and sell cycle is more expensive).

  • Large spreads and decreased volumes of trade lead to increasing cost of capital.

  • Increased cost of capital means slow corporate growth and a relatively weak economy.

Conclusion:

 

The fact that accounting systems and annual reports donít have to reflect the correct status and current attributes of the economic value of firms and intangible assets leads to information asymmetry on intangible assets in corporations, which leads to:
 

1. Value Creation below the maximum possible,
2. Management for Value being suboptimal, and finally
3. Measurement of Value remains difficult.

 

   
 

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