The Added Impact of Misinformation

Growth has suffered from a rise in hurdle rates, due to the change in management incentives, probably amplified by misleading publicity about the cost of equity capital, which is commonly claimed to be a multiple of the real cost. The bonus culture encourages managements to misrepresent RoEs, so in bad times companies publish abysmal rather than merely bad profits, with the result that subsequent profits are overstated. The swings from understated to overstated increase published profit volatility. After being similar for fifty years, published profits have since 2000 become four times more volatile than national account profits. Claims that low investment and high margins are due to increased monopoly are shaky. The bonus culture is a better explanation as, among other things, it also accounts for the different levels of investment by quoted and unquoted companies and for the increased volatility of published profits.