Secret Reserve

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Secret Reserve

The amount by which shareholder equity in a company exceeds the amount claimed on its financial statements. Secret reserves arise when a company overstates its liabilities or understates its assets, usually because its accounting practices depart from GAAP. In such cases, the company must declare that its accounting is different from that of most other companies. The secret reserve may eventually be converted to cash and distributed to shareholders. It is also called the hidden reserve.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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We argue that the use of secret reserves was intended to extend directors' control over BSA's assets by preventing shareholders from monitoring the annual performance of the company.
Buckley, the presiding judge, endorsed the acceptability of internal or secret reserves. The creation of such reserves had the effect of producing a balance sheet that would "shew the financial position ...
Arthur Chamberlain's reasons for opposing secret reserves were reported in The Times on 2 August 1906.
Similarly, secret reserves may inhibit potential bidders, who suspect that the sellers may have unwarranted expectations and the reserve set too high.
(14.) As a check for robustness of results to censoring associated with potential bidders avoiding auctions with secret reserves and high minimum bids, we estimated the models for the subsample of auctions with no reserve and a minimum opening bid less than the sample median of $25.
Alternatively, for a sample of Pokemon cards sold by the authors, Katkar and Lucking-Reiley (2000) find that 46% of auctions with a secret reserve result in a sale, whereas 70% of public reserve auctions result in a sale.
Napier's article discusses the history of using secret reserves to manage earnings by some companies in New Zealand.
For example, in a $53.9 million sale of Van Gogh's Irises, Sotheby's, a respected auction house, agreed, prior to the sale, to lend one bidder "half of whatever he bid" for the painting, using the work of art as collateral for the loan.(44) Auction houses also use price guarantees and set secret reserves below which they will not sell the object.(45) Although a secret reserve may not itself be objectionable, the fact that auction houses frequently pretend that they have sold paintings to fictitious bidders when the secret reserve has not been met can be seen as a method of creating the impression that art is selling for more than people are actually willing to pay for it.
A less intrusive deterrent would be for auction houses to disclose the existence of a secret reserve at the end of the bidding, rather than the beginning, which encourages bidders to bid the true market value of the piece or risk not getting it.
Hidden or secret reserves. These present a problem in any country, including the United States.
Lucking-Reiley, Vanderbilt University, "Public versus Secret Reserve Prices on eBay Auctions: Results of a Pokemon Field Experiment"
Sellers in eBay auctions have the opportunity to choose both a public minimum bid amount and a secret reserve price.