Disclosures are at the center of the public's crisis of confidence when it comes to the corporate world. They should be viewed as a very important and informative part of a research report, but until recently, they have gone relatively unnoticed. This article will define what a disclosure is and why it is important to investors. (To learn more about the corporate world, see 5 Of The World's Oldest Companies.)

TUTORIAL: Financial Statements

According to Webster's Dictionary, the definition of "disclose" is "to uncover or reveal." In research reports, a disclosure is a statement that reveals the nature of the relationship between the analysts, their employer and the company that is the subject of the research report (also known as the "subject company"). It also provides other statements (warnings) that investors should read.

The disclosure is as important to a research report as footnotes are to a corporate financial report. The Securities and Exchange Commission requires that all research reports contain a disclosure statement. In my article "Six Signs Of An Objective Research Report," I stated that if you are reading a research report that does not have a disclosure statement, you should throw it away. You should not trust a so-called research report that does not have a disclosure statement.

The Relationship
The importance of disclosures is evidenced by the fact that they appear at the end of the report and usually in very small print, like footnotes to a 10-k. A disclosure contains information on the relationship between the analyst, the brokerage firm that employs him or her and the subject company. It may take a magnifying glass and a strong cup of coffee, but if you read it you should be able to determine who "paid" for the research report and the degree of objectivity that may, or may not, be present. (To learn more, see Pick Better Stocks By Consulting Form 10-K.)

In Plain English
The bad thing about disclosure statements is that they are written by lawyers, who are more concerned about protecting the brokerage firm than providing easy-to-read information. Lawyers use legal boilerplate that makes disclosures verbose and hard to read (hence the need for the strong coffee). Disclosures have typically been printed in small type because they are long and because brokerage houses want to save paper (thus the need for a magnifying glass). (To learn more, see How To Interpret A Company's Prospectusand Where can I get a company's prospectus and/or financial statements?)

The key points covered, or stated, in most disclaimers are as follows (with my added comments and explanations):

  • "This report contains forward-looking statements ... actual results may differ from our forecasts." (In plain English, "This is our best guess, but we may be wrong.")
  • "This report is based on information from resources that we believe to be correct, but we haven't checked it." (In other words, "As recently proved, we all assumed that corporate financial statements contained true information about a company's operations. But, no analyst can audit a company's books to verify the truth of that assumption. That is the job of the accountants.")
  • The nature of the relationship between the subject company and the brokerage firm. Does the firm make a market in the stock, and/or have they done investment banking for the subject company? (Brokerage firms do not produce research reports for free. Historically, income generated from trading, or investment banking, has funded research departments.)
  • Whether or not the analysts and other members of the firm may trade or own shares in the subject company. (Is it bad that an analyst puts his money where his mouth is?)
  • "This report is being provided for informational purposes only, and on the condition that it will not form a primary basis for any investment decision." (Then why are you giving me the report?)
  • "Investors should make their own determination of whether or not to buy or sell this stock based upon their specific investment goals, and in consultation with their financial advisor." (Probably the best bit of advice in the disclaimer.)

More disclosure is always a good thing, but if history is a guide, the "new" disclosure rules will be no better than what we already have. Some of the current proposals call for the disclosure to be on the front page and to contain "more information." But, this requirement may result in more words and less information.

Disclaimers best serve investors when they are written in the KISS (keep it simple, stupid) style. For example, I propose the following format for disclaimers:

  • This report is based on public information that we assume to be true and correct.
  • My assumptions and forecast may be wrong.
  • I own xx shares and have owned these shares for xx years.
  • Our brokerage firm makes money by making a market and performing investment-banking services for the companies in this report.
  • This investment may not be suitable for all investors. You must consider your specific investment goals and styles before investing in any stock. Consult with your financial advisor before making any investments.

Disclosures of this clear and succinct style will help investors regain some confidence in Wall Street. And they just may add some lawyers to the unemployment line.

Related Articles
  1. Retirement

    Footnotes: Early Warning Signs For Investors

    These documents hold very important information, but reading them takes skill.
  2. Investing Basics

    12 Things You Need To Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  3. Personal Finance

    Spotting Companies In Financial Distress

    What are the warning signs that a company is struggling - or worse, sinking - financially? Read on to find out.
  4. Fundamental Analysis

    Financial Footnotes: Start Reading The Fine Print

    Find out what could be hidden in this often-overlooked part of the financial statements.
  5. Active Trading

    Using Public SEC Filings To Analyze Companies

    Reports from the Securities and Exchange Commission provide investors with an edge in determining the investment value of companies. Learn what to look for in these financial reports.
  6. Retirement

    Avoid An Audit: 6 "Red Flags" You Should Know

    Don't make yourself a target - steer clear of these attention-grabbing tax-filing practices.
  7. Personal Finance

    8 Ways to Find Cheap Textbooks

    Textbooks are so expensive. What are the tricks to find cheaper books?
  8. Personal Finance

    Dissecting the Simple Interest Formula

    Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest.
  9. Investing

    How Conscious Consumers Are Changing Business

    Thanks to the growth of conscious consumerism, corporations must evolve or lose ground to new, ethos-based entrepreneurial models.
  10. Professionals

    How Advisors Can Give Back to the Community

    It's a good idea to consider ways to give back to your community, especially to those in need of a financial education.
  1. How do researchers ensure that a simple random sample is an accurate representation ...

    Researchers employ several safeguards to ensure that a simple random sample accurately represents a larger population. They ... Read Full Answer >>
  2. What are the benefits of research and development for a company?

    Some advantages of research and development are clear, such as the possibility for increased productivity or new product ... Read Full Answer >>
  3. What are the best selection methods for creating a simple random sample?

    The best selection methods for selecting a simple random sample are the lottery method, using a random number table or having ... Read Full Answer >>
  4. What are the disadvantages of using a simple random sample to approximate a larger ...

    Simple random sampling statistically measures a subset of individuals selected from a larger group or population to approximate ... Read Full Answer >>
  5. What are the advantages and disadvantages of using systematic sampling?

    As a statistical sampling method, systematic sampling is simpler and more straightforward than random sampling. It can also ... Read Full Answer >>
  6. What are examples of businesses that exhibit social responsibility?

    In the 21st century, companies that exhibit corporate social responsibility are winning high marks from consumers and investors ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!