The Fall of Enron [Archive.org URL]

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.

FinanceProfessor.com Annotation:
Haley and Palepu have done it again! Another smash hit. This one looks at the Fall of Enron. His is the paper that I had wanted to do but never had the time. GREAT! Almost reads as a novel but is encompassing to look at not just what happened, but how it was allowed to happen, and how to prevent it in the future. Look for it coming to a publication near you!

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