IPO Disclosures Are Ripe for Reform

Current financial disclosure rules let would-be public companies shape a rosy narrative about their prospects and obscure information that investors should know.

- 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 They are outdated, and it is time for them to change.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.

As an alternative to one-size-fits-all disclosure rules, we propose triggered disclosures tailored to the value drivers of the company going public. Under these disclosures, claims about customer value and potential market size must be supported by a consistent, objective collection of baseline data related to those claims. These slimmer, more focused disclosures would provide investors with a better basis for valuing and pricing today’s companies. They also could force founders and managers to tell more realistic stories about their businesses, not fairy tales, while holding them accountable for delivering on their promises.