Disclosure

The meaning of the word "disclosure" is not greatly different in the context of investment from its usual meaning in ordinary English. Because companies have a great deal of leeway in choosing what to disclose, it is an important issue for investors.

The numbers and facts the companies have discretion over disclosing are often useful to investors. Most of the examples below give extra detail on underlying trends and are therefore very useful for modelling and forecasting. When a company fails to disclose numbers that its peers do investors should be suspicious: the company may have something to hide.

Obviously there is a great deal that companies are compelled to disclose, however there is a great deal of useful information that companies may or may not choose to disclose. Common examples include the disclosure of divisional profits and organic growth rates.

Some of the extra disclosure is only relevant to, or is only widely used in, certain industries. Examples of these are like-for-like growth rates (for retailers) and proportionate numbers (for mobile telecoms).

Disclosure of liabilities has been a problem in the past, particularly the use of off-balance sheet financing. However improvements to accounting standards designed to address this should mean that it will be less of a problem in the future. There is, in any case, little investors can do about this type of problem, as the omission is not usually apparent from the published accounts.

One thing investors can do is to read the notes to accounts very carefully, as companies sometimes attempt to bury awkward numbers deep in the notes. This is not a matter of disclosure but presentation, but the intent and end result are often the same.

Although one would expect sell-side analysts to find and draw attention to such trickery in presentation, experience shows that it can be a surprisingly effective tactic. There have been many instances of the market reacting strongly to "bad news" that was disclosed in the notes to the last set of accounts. So much for efficient markets!

In general, greater disclosure is good from investors point of view. It means they can assess companies more accurately. It also makes it less likely that the numbers they have are in some way misleading. Like any form of transparency, it engenders greater trust.

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