Analyzing business models

New types of disclosure and reporting are argued to be vital in order to convey a transparent picture of the true state of the company. However, they are unfortunately not without problems as these types of information are somewhat more complex than the information provided in the traditional financial statement. Plumlee (2003) finds for instance that such information imposes significant costs on even expert users such as analysts and fund managers and reduces their use of it. Analysts’ ability to incorporate complex information in their analyses is a decreasing function of its complexity, because the costs of processing and analyzing it exceed the benefits indicating bounded rationality. Hutton (2002) concludes that the analyst community’s inability to raise important questions on quality of management and the viability of its business model inevitably led to the Enron debacle. There seems to be evidence of the fact that all types of corporate stakeholders from management to employees, owners, the media and politicians have grave difficulties in interpreting new forms of reporting. One hypothesis could be that if managements’ own understanding of value creation is disclosed to the other stakeholders in a form that corresponds to the stakeholders understanding, then disclosure and interpretation of key performance indicators will also be facilitated.