Chapter 15. Let the Market Choose

Limitations of the Market

The market is a powerful mechanism that does some things very well, but not everything. It is often argued that the securities market should select honest, principled firms and reward them with high share prices, and conversely penalize with low valuations firms with dishonest accounting and limited reporting. But this is naive. Dishonesty provides a firm with an apparent (though not real) advantage in performance, and as long as the dishonesty doesn’t call attention to itself, and as long as there are professionals who profit from accepting the numbers uncritically (accountants, analysts, bankers, and brokers who, if challenged, will say, “Oh, but accounting’s not an exact science”), ...

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