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Monday, November 21, 2011

When it pays to disclose-examples from investing and valuation

Some examples are given below from business and beyond.
  • The more prior art is cited in patents, the more valuable they become. That is because the patent itself works around the existing pathways instead of using them. Therefore, it is not only novel but often preempts expensive infringement suits. 
  • The more broad the claims, the less difficult is it to bypass patents. That is why patent offices globally are very careful to avoid granting(or revoke if already granted) broad patents-as the infamous example of the infringement suit which Henry Ford had won. 
  • In M&A deals, the agreement often states that material adverse change shall not include any risk factors already outlined in the publicly available financial filings(eg 10-K risk factors). 
  • Narayan Murthy of Infosys recalls that when Infosys lost money in share market speculation during its initial years, it came clean to the investors and promised not to be so careless next time onwards. Investors readily forgave them, because of them being upfront. 
  • During public offerings, if the regulator deems that disclosures in prospectus are insufficient, then the issuer/promoters are liable to suits from investors who want compensation for post issue share price crashes
  • A standard analyst tool is to check for the quality and quantity of disclosures, to cut the financial risk from investor angle. So companies who disclose more are rewarded.

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