Does Disclosure Help?

By James Kwak

Following up on yesterday’s column about corporate spending, I saw that John Coates (Harvard Law School) and Taylor Lincoln (Public Citizen) have published a study of the relationship between voluntary disclosure of political spending and company value (summary here). In short, after applying a bunch of controls, they find that companies with voluntary disclosure policies have price-to-book values that are 7.5 percent higher than companies that don’t.

Citing earlier research, they also say, “among the S&P 500 – which accounts for 75 percent of the market capitalization of publicly traded companies in the U.S. – firms active in politics, whether through company-controlled political action committees, registered lobbying, or both, had lower price/book ratios than industry peers that were not politically active.”

Of course, the causality could run either way, and Coates and Lincoln are not claiming that voluntary disclosure in itself makes a company more valuable. Disclosure policies make it less likely the CEO will blow company money on her pet political projects, and so it stands to reason that companies that are better governed in general—and hence more valuable—are more likely to have such policies. But it certainly implies that disclosure policies are not going to bankrupt the Great American Corporation.

25 thoughts on “Does Disclosure Help?”

  1. More likely, correlation is spurious. Certain industry sectors are probably prone to have higher/lower disclosure and higher/lower price/book ratios. For example, certain tech companies have strict no-donations policies, and have elevated valuations.

    That’s not to say the policy isn’t a good idea – however, arguments that companies should do something for the common good because it’s also in their own good rely overmuch on their benevolence. We shouldn’t care whether it is or isn’t in the good of a specific company, but only whether it’s in the interest of the economy (and polity) as a whole. Otherwise, granting monopolies for the purpose of enriching shareholders would be a legitimate activity.

  2. “Does Disclosure Help ?”

    ,…hmmm – “to be or not to be, that is the question[?]”
    No – Not if the 4th Estate (MSM) is relegated to a “Procrustean Operation”?

    Quoted [sic] writings from,… author’s name lost in pile of manuscripts, sorry. You be the judge?

    “The year was 1921, and under the instructions, and wishes of Jacob Schiff the “Council of Foreign Relations” was founded (funded [?] by whom) by Bernard Baruch and Colonel Edward Mandell House. Schiff’s explicit orders prior to his death in 1920 was to select favorable politicians for implementing the formation of the “CFR”. They met in Paris, France… May 30,1919 (think of decade[nce] planning, and Jekyll Island, the latter?). The CFR had approximately 1,000 people in the United States, which by the way includes virtually every industrial (empire[?]) conglomerate in America,… all American based International Bankers, and heads of all their “Tax Free Foundations”. In essence they provided the capital to anyone who wished to run the Congress, the Senate, or the Presidency! The first job of the CFR was to gain control of the press, given to John D. Rockefeller,… such as the “National News Magazines – Life & Times”. He (JDR) financed Samuel Newhouse to buy up newspapers and established chains across the United States, and Eugene Meyer would buy up many publications such as the Washington Post, Newsweek, and the Weekly Magazine. The CFR also needed to gain control of “Radio, Television, and the Motion Picture Industry”. This task was split amongst the International Banker’s from, Kuhn & Loeb, Goldman Sachs, the Warburgs, and the Lehman’s.”
    end [sic] Quote
    Before we get into a conspiratorial spat, let me assure you that the historical timeline is correct and correlates exactly to the events aforementioned. Furthermore, in today’s “New World Media Paradigm”, you’ll notice the unprecedented momentum to consolidate the internet, through Government eavesdropping,… whether it be for HLS, the Patriot Act, or the Classification of all news (phone wiretaps/ computers compromised, etc.) relevant or naught under National Security Limitless Guidelines!
    Note: Rupert Murdoch, Mr. Black, the “Economist[?]”,etc., etc., are all pawns ,…?
    Facebook, Google, Twitter, et.el. can all be informational gathering sources for manipulation, as we all know by now? JMHO
    Conjecture or Paranoia [:-)]?
    PS. Reading between the lines can’t read “Artificial Droid Intelligence Sub-Text Software” in the 21st Century unless you are the codified Androids? Cheers!

    Thankyou James, and Simon

  3. @ Stats Guy, “Otherwise, granting monopolies for the purpose of enriching shareholders would be a legitimate activity.”

    Good point, but isn’t this being accomplished now with *shorting* companies and after killing them with pure made up gossip, buying them *cheap* (twin sister of greed)?

  4. It’s probably a limited benefit, considering a vast majority of the public has no interest in reading audited financial statements. Interested third parties could be influenced by disclosure, yet it is hard to imagine Jeremy Bentham’s “greatest good for the greatest number” would ever apply here.

    Having said that, err on the side of transparency, because sunlight is the best disinfectant at controlling dishonesty and shading dealings. And Heaven knows, these qualities today have reached epidemic levels.

  5. As an MBA and CPA, I am somewhat disgusted by the lack of meaningful information on financial statements of publicly listed companies, which of course includes the paucity of information found within the footnotes. In a rather warped way, I believe that participants in the capital markets skip the financial statements, and just substitute price movements and analyst reports for analysis. That denigration of financial statement value is what gave rise to the Enron fiasco, as they were allowed to publish only an Income Statement (tying to nothing) without consequence or protest from the exchange or SEC… or even the auditors.

  6. As an MBA and CPA, I am somewhat disgusted by the lack of meaningful information on financial statements of publicly listed companies, which of course includes the paucity of information found within the footnotes. In a rather warped way, I believe that participants in the capital markets skip the financial statements, and just substitute price movements and analyst reports for analysis. That denigration of financial statement value is what gave rise to the Enron fiasco, as they were allowed to publish only an Income Statement (tying to nothing) without consequence or protest from the exchange or SEC… or even the auditors.

  7. If you to mess up a good company, and the middle class, just introduce the financials to it and they shall sap and mine it to the consumers last dollar or last nerve. There was a day when you got paid in cash, to make it easier for the employer, checks were introduced and cashed for free. Then financials wanted their piece of the pie just to find a way to charge for the transaction. Todays checks are @3-5% lighter just for the privlage of cashing them, and moving money around for free costs the consumer dearly. Pretty soon it will cost 2% just for the privlage to swipe a card and save wear and tear on a currency. Greed may wear a different mask, but he always shows up at the same party.

  8. Thats “if you *want* too” above

    @ Not if the 4th Estate (MSM) is relegated to a “Procrustean Operation”?

    I have noticed lately that the MSM is ever more desperate to pick themselves up, on camera, its actually rather pityful especially considering that they are timed/trained each day to laugh it all off at that moment, and some don’t show either. We already know the law and elderly have been pumping up themselves desperately, and of course politicians are only one big day and nite long party, so the 4th estate is showing some signs of insanity after trying to manage all on its plate for ever so long…..And welcome aboard cmk 011, to the base. Where you can expect the unexpected.

  9. @Annie, technically that is illegal. Enforcement is the issue – the SEC has no teeth, and even if it did, proof is difficult except in the most egregious of cases.

  10. Eventually J and K will comment (more) on the Super-committee. I learned today that it has
    a web site: deficitreduction.gov . This title depressed me extremely. I went there,
    discovered one could enter a comment, and so — even knowing how futile it would be —
    I entered the following:

    (start)——————————————
    We are suffering through a terrible Recession/Depression/Slump/
    Downturn — you pick your word. Millions are without jobs, hence
    without income. Businesses are firing, not hiring; why not? since
    no customers come through the front door.

    Does this not tell you that _demand_ must pick up? And where is
    that demand going to come from, if not from the government? The
    government should be spending money like water! on new bridges,
    new roads, new trains, new schools; more on wind turbines, on
    electric cars, and — yes — on more and better solar panels.

    So much unfilled demand. So many needs. And yet you are thinking
    of _cutting_ spending. If the arguments of the previous paragraph
    don’t persuade you, why don’t you look at history? The horrible
    collapse of 1929-1940 dragged on, and got worse when the then
    government tried to balance the budget. Only when World War II
    hit, and we spent like mad, did prosperity return.

    Who among you Twelve knows this? which of you knows economics, or
    history? Heaven help our mis-led country!

    Alan McConnell in Silver Spring MD
    ————————————(finish)

    Maybe if 20 of us, or 200 of us, would write something similar,
    someone might read it. One can always hope . . .

    Best wishes,

    Alan McConnell, in Silver Spring MD

  11. @Stats Guy

    The SEC is destroying documentation after their *investigation* into fraud is concluded and before the *facts* are acted upon.

    That makes them conspirators, not enforcers of LAW.

    It’s bad, very bad. It’s OBVIOUS that this manufacturing of poverty is REAL.

  15. The link that supposedly takes you to the “study” actually takes you to a backgrounder with a lot of stuff on the supreme court citizen united, and few summary slides.
    As to the 7.5% – the authors of the study say that that is significant at the 0.05 level, which means, given that authors almost always overplay the sginificane of the their own work (at least in biomedical research , which i have some familiarity with, maybe I can’t spell but I do Know something about DNA and in vitro diagnostics and so forth)
    a 0.05 significance level means they probably have found…nothing

  16. Well folks it’s official. I don’t care who the 3rd party candidate is, or if Ron Paul is left standing at Republican nomination time. I’m not wasting another vote on the basturd. I thought just once one of these people would want to do something outside of the negative stereotypes (I don’t need to mention the 5 mile laundry list do I???). All 4 members of my family voted for him in the reddest state in the country. Never again

    You can’t blame Republicans for this Skippy, and you can’t blame them for sitting on your hands leading up to the failed mortgage cramdowns vote in the summer of 2009—that’s all on you Skippy and I can tell you as a strong Dem, without my vote (I am your base, or rather was your base) you’re going to play hell winning 2012.
    http://www.zerohedge.com/news/another-popular-name-emerges-solyndra-scandal

    I got emotional when I saw the crowds in Chicago after you won. What an idiot I was.

  17. It could be that companies that do not disclose giving and have lower p/b ratios are those companies with more tenuous market that feel the need to keep quiet how they purchase their influence. It may simply be a matter of them perceiving that they need to keep quiet as to how they go about trying to survive, rather than the notion that telling everything about what you do will somehow make your company more attractive to buyers of stock.

  19. @Woych

    Does she and her followers KNOW that you’re going up against the GLOBAL War Lords and the GLOBAL Drug Lords?! The weapons used were PSYCHObabble (*religion*?), math algorithms (financial instruments), and *technology* like drones, etc. (Patriot Act)….

    Let’s start with WHY the Military of the United States of America had to hire so many GLOBAL MERCENARIES….

    Armies at war ALWAYS take the last egg-laying chicken away from the villagers (er, “middle class”)…

    This is EPIC, Woych. It’s a HUMAN SPECIES moment, not *consumers* trying to find the last remaining egg (gossip said my neighbor had it) to hatch a chicken…

  20. Does the “1st Amendment (Commercial Speech) & Judicial Restraint v. Judicial Activism” help the argument for Corporate Disclosure?

    Ref: “Judicial Activism”___”The Most Activist Supreme Court in History”___”Court’s Data-Mining Ruling: Big change on Commercial Speech”___”History/ Archive of all Supreme Court Cases”….. respectively *as usual, Google if link fails :-(

    http://en.wikipedia.org/wiki/Judicial_activism

    http://www.press.uchicago.edu/ucp/books/book/chicago/M/bo3642194.html

    http://www.firstamendmentcenter.org/courts-data-mining-ruling-big-change-on-commercial-speech
    http://www.firstamendmentcenter.org/supreme-court-cases

    Thankyou James

  21. @Stats Guy: “Otherwise, granting monopolies for the purpose of enriching shareholders would be a legitimate activity.”

    Wait a minute — you mean it’s not?

    There is no excuse for corporations to make political contributions of any kind. Democracy is a way for people to govern ourselves.

    Corporations are not people. http://www.movetoamend.org

  22. http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7313

    September 14, 2011
    Post 9/11 Wars and Violations of Civil Liberties Continue
    Michael Ratner​: Obama administration has reversed very little of Bush policy
    MICHAEL RATNER, PRESIDENT, CENTER FOR CONSTITUTIONAL RIGHTS:
    go to “transcript” tab with video interview):
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7313

  23. At the bottom of the page on Schedule B, Form 1040, there’s disclosure check-a-boxes requesting information regarding ownership or signatory authority with respect to foreign accounts….which is designed to reduce the chance(s) of hiding income/assets abroad.

    This links disclosure to transparency to correct reporting. When disclosure isn’t revealed, it leads to obfuscation of the financial position of the individual. I link you all to this story….

    http://www.rawstory.com/rs/2011/09/16/u-s-tax-evasion-probe-leads-to-israeli-banks/

    in tax reporting as well as in financial reporting, DISCLOSURE is absolutely essential to revealing an accurate picture, as opposed to a “doctored’ image.

    Also, good GAAP makes it a requirement.

  25. I agree that the opportunity to spend money on political contributions and expenditures is not going to bankrupt businesses, but that’s not the only policy goal that disclosure rules target. That’s not even their primary target. I wrote a piece a while back for Harvard Law & Policy Review (http://hlpronline.com/2011/05/disclosure-is-not-the-cure-all-liberals-want-it-to-be/) arguing that disclosure is an inadequate solution to the money-in-politics problem for at least two reasons:

    1) Because disclosure often comes into play when there are significant information asymmetries, more information does not enable policymakers, voters, or consumers to make better decisions. If a patient goes to a doctor who says he met with a drug rep before prescribing a certain medicine, the patient is not able evaluate whether or not to take the medication. He’s not going to ask another doctor or know how to assess the risks involved. Similarly, when an economist is testifying during a financial crisis before the Senate, how is a Senator to properly discount testimony that has industry support? The element of duress makes the ineffectiveness of disclosure rules even more pronounced.

    2) Disclosure in many ways legitimates conflicts of interest by telling politicians and professionals, in effect, ‘so long as you told everyone what you’ve done, whatever questionable activity you engaged in was presumably acceptable.’ It might even be making behavior worse. As research by Cain, Moore, and Loewenstein revealed, disclosure seems to give experts the impression that they have dealt with the ethical problems posed by their conflict of interests and can sometimes exacerbate the extent to which expert statements become self-serving. As Courtney Humphries at the Boston Globe noted, policymakers may be treating disclosure as a panacea and refusing to address the conflicts of interest that are the real source of corruption.

    There’s a good piece by Cain, Moore, and Loewenstein on this point, titled “When Sunlight Fails to Disinfect,” available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1635819

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