IPO Disclosures Are Ripe for Reform.
By Aswath Damodaran, Daniel M. McCarthy, and Maxime C. Cohen
Rules meant to protect investors have turned out to be no match for bankers pitching today’s businesses to the public markets.
In theory, disclosures required of would-be public companies should provide investors with the critical information needed to determine whether they want to buy in, and at what price. Less obviously but equally important, disclosures should bolster good management practices by establishing sound performance metrics. However, existing disclosure regulations fail on both counts. They are outdated, and it is time for them to change.
Current rules were designed for a different era, when the companies going public were more established and had proven business models. Today’s companies, in contrast, often have untested business models. What companies disclose about their customers is completely voluntary, so executives can — and do — select data that paints their companies in the best possible light. Their disclosures are bloated, uninformative, and often misleading, and investors lack the data they need to make informed decisions or to hold managers and board members accountable.
Read the full MIT Sloan Management Review article.
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Aswath Damodaran holds the Kerschner Family Chair in Finance Education and is Professor of Finance at New York University Stern School of Business.