Efficient Capital Markets, Corporate Disclosure and Enron

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Yale Law School

Yale Law School Legal Scholarship Repository
Faculty Scholarship Series Yale Law School Faculty Scholarship

1-1-2004

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

Follow this and additional works at: http://digitalcommons.law.yale.edu/fss_papers Part of the Law Commons Recommended Citation Macey, Jonathan R., "Efficient Capital Markets, Corporate Disclosure and Enron" (2004). Faculty Scholarship Series. Paper 1419. http://digitalcommons.law.yale.edu/fss_papers/1419

This Article is brought to you for free and open access by the Yale Law School Faculty Scholarship at Yale Law School Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship Series by an authorized administrator of Yale Law School Legal Scholarship Repository. For more information, please contact julian.aiken@yale.edu.

EFFICIENT CAPITAL MARKETS, CORPORATE DISCLOSURE, AND ENRON
Jonathan R. Maceyt
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1. A BRIEF HISTORY OF ENRON CORPORATION. . . . . . . . . . . . . .. II. ENRON AND U.S. CORPORATE GOVERNANCE. . . . . . . . . . . . . .. A. Proximity........................................... B. Objectivity.......................................... C. Adaptability D. The Role of Shareholders E. Analysts............................................ F. Credit Rating Agencies G. The Market for Corporate Control H. Accounting Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. III. ENRON AND CORPORATE DISCLOSURE A. Mandatory v. Enabling Rules B. Externalities........................................ C. Collective Action Problems......................... IV. ENRON AND MARKET EFFICIENCY CONCLUSION : .. INTRODUCTION The market capitalization of Enron Corporation declined by $63 billion in the one-year period between January 2001 and January 2002. 1 In practical terms, this means that someone who invested in Enron, Inc. for a comfortable retirement "nest egg" in 2001-say 3000 shares worth about $250,000-would barely have enough money to buy a major home appliance a scant year later. 2 Ironically, Enron's shares were thought prior to January 2001 to experience relatively low volatility. The collapse of Enron dealt a stunning blow, not only to people's wallets and a once-formidable U.S. corporation, but also to a number of conventional theories and core beliefs within the legal academy. The theories and beliefs challenged by the Enron debacle include the t J. DuPratt White Professor of Law and Director, John M. Olin Program in Law and Economics, Cornell Law School. The author thanks Michael Heiss and the seminar participants in the Cornell Law School Faculty workshop series for helpful comments. 1 See Gary Katz, Enron, CBC NEWS ONLINE, Feb. 2002, at http://www.cbc.ca/news/ features/ enron.html. 2 See id.

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following: (1) the U.S. corporate governance system is the best in the world; (2) the U.S. system of corporate disclosure,is the best in the world; and (3) the U.S. capital markets, particularly the markets for large corporations such as those listed on the prestigious New York Stock Exchange (NYSE), are highly efficient. Following a brief corporate history of Enron, Parts I, II, III, and IV of this· Article discuss, in turn, what remains of each of these conventional academic theories in the wake of Enron's collapse. My principal conclusions are as follows: Initially, with respect to U.S. corporate governance, the collapse of Enron reveals the fundamental tradeoff between objective and proximate monitoring by corporate directors, auditors, rating agencies, analysts, and others. 3 Second, the collapse of Enron demonstrates that disaster ensues when supposedly neutral and objective corporate monitors are "captured"...
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