It used to be thought that the markets were rational: this is only true some of the time. Share prices are significantly determined by the analysts of the City and like places, who move from periods of excessive optimism to excessive gloom. The true value of a share must be the discounted value of its future cash flows. Surely this is a proper topic to be discussed in the accounts and accordingly should be considered for a future standard.
If companies are to include pension and other market base valuations in their accounts, they must be entitled to some advice on the valuation of those shares. The current system leaves them at the mercy of the market.
Such a standard should include the market price over the past one-to-three years; a calculated price based on discounted current dividends and justifiable growth; a calculated price based on the past three years and any other basis the company wished to nominate. The directors would then be required to comment on the market valuation and what justification they believed there was for differences with the other valuations, where this was significant.
It would give investors a benchmark to work from and an inside view of a company’s worth. It might even eliminate the excesses of the bull and bear markets and the consequences for the many investors.
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