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The Fall of Enron

46 Pages Posted: 17 Oct 2003  

Krishna Palepu

Harvard University - Harvard Business School; Harvard University - David Rockefeller Center for Latin American Research; Harvard Business Review; NBER; International Academy of Management

Paul M. Healy

Harvard Business School; National Bureau of Economic Research (NBER)

Date Written: 2003

Abstract

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

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

Krishna Palepu (Contact Author)

Harvard University - Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6759 (Phone)
617-496-7363 (Fax)

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=6527

Harvard University - David Rockefeller Center for Latin American Research ( email )

1730 Cambridge St.
Cambridge, MA 02138
United States

HOME PAGE: http://www.drclas.harvard.edu/faculty/directory/professors/view/150

Harvard Business Review ( email )

Boston, MA
United States

HOME PAGE: http://hbr.org/authors/palepu

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/krishna_palepu

International Academy of Management ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://theiam.ws/?person=palepu-krishna

Paul M. Healy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-1283 (Phone)
617-496-7387 (Fax)

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