46 Pages Posted: 17 Oct 2003
Date Written: 2003
We will assess how governance and incentive problems contributed to Enron's rise and fall. A well-functioning capital market creates appropriate linkages of information, incentives, and governance between managers and investors. This process is supposed to be carried out through a network of intermediaries.
We show that despite this elaborate corporate governance and intermediation network, Enron was able to attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels. While Enron presents an extreme example, it is also a useful test case for potential weaknesses in the U.S. capital market system. We believe that the problems of governance and incentives that emerged at Enron can also surface at many other firms, and may potentially affect the entire capital market. We will begin by discussing the evolution of Enron's business model in the late 1990s, the stresses that this business model created for Enron's financial reporting, and how key capital market intermediaries played a role in the company's rise and fall.
Keywords: Corporate Governance, Enron, Accounting, Capital Markets, Capital Market Intermediaries, Board of Directors, Analysts
JEL Classification: D40, G34, M41, G10, G29, K10, L10, L90, N20
Suggested Citation: Suggested Citation
Palepu, Krishna and Healy, Paul M., The Fall of Enron (2003). Journal of Economic Perspectives, Vol. 17, No. 2, Spring 2003. Available at SSRN: https://ssrn.com/abstract=417840 or http://dx.doi.org/10.2139/ssrn.417840
By Robert Rosen
By April Klein