Discretionary reporting practices could be exploited by future market leaders.
In a world frantically grasping for information content, the financial statements of UK biotechs are notably bereft. According to a study published in the Journal of Accounting and Public Policy, the mandated earnings announcements of virtually all smaller UK biotechs have no market effect. Instead, investors rely on voluntary non-financial disclosure. And therein lies the problem.
‘As the disclosure is discretionary, managers release only good news,’ explains paper co-author Stephen Lin, associate professor of accounting at Florida International University. ‘So little bad news is disclosed to the market, we couldn’t even study it, yet low-success probabilities in drug trials would suggest a preponderance of bad news in this industry.’
This bad news deficit is actually bad news for the industry, argues Lin. While companies are loath to reveal competitive information, it ultimately affects valuation. ‘If disclosure is inaccurate, investors can’t make prudent investment decisions,’ Lin says. ‘And if capital isn’t invested efficiently in this industry, society loses.’
Lin believes individual firms can break away from the pack by establishing a reputation for clear, consistent disclosure. ‘All industries have disclosure leaders,’ he says. ‘They usually attract a wider investor base and raise more capital.’
