Efficient Capital Markets, Corporate Disclosure and Enron

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Efficient Capital Markets, Corporate Disclosure and Enron
Jonathan R. Macey
Yale Law School

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Macey, Jonathan R., "Efficient Capital Markets, Corporate Disclosure and Enron" (2004). Faculty Scholarship Series. Paper 1419.

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The downfall of Enron also illustrates both the importance of corporate governance to corporate performance, and the inherent susceptibility to corruption present in any system of corporate governance. Further, from an international perspective, one is tempted to ask whether the Enron debacle could happen in Europe or Japan or whether it demonstrates a vulnerability unique to the U.S. system of corporate governance. I have three observations to make on this issue. First and foremost, the Enron fiasco demonstrates the acute pressure felt by U.S. corporate management to produce superior performance results. As discussed later in this Article, Enron 's financial maneuvering, which led to the company 's massive 2001 restatement of earnings, was prompted only in 1997 when Enron came under significant pressure from investors. Essentially, Enron 's corporate performance was consistent for a considerable period of time prior to 1997. 4 However, between 1996 and 1997, the firm 's profits and return on equity each declined by ninety percent. 5 The sudden deterioration in performance pressured management to engage in transactions that increased revenue and moved debt off of the firm 's
3 This monitoring tradeoff is developed in more detail in my Article coauthored with Arnoud Boot, also presented in this Symposium. See Arnoud
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