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Negotiation, Organizations and Markets Research Papers
Harvard NOM Research Paper No. 03-38

The Fall of Enron

Krishna G. Palepu Paul M. Healy

This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection:: http://ssrn.com/abstract=417840 The Fall of Enron (Journal of Economics Perspectives, Volume 17, Number 2. (Spring 2003), pp. 3-26 Paul M. Healy and Krishna G. Palepu

Paul M. Healy is the James R. Williston Professor of Business Administration and Krishna G. Palepu is the Ross Graham Walker Professor of Business Administration, both at Harvard Business School, Boston, Massachusetts. Email addresses: [e-mail], and [e-mail]

From the start of the 1990s until year-end 1998, Enron’s stock rose by 311% percent, a modest increase over the rate of growth in the Standard & Poor 500. But then the stock soared. It increased by 56% in 1999 and a further 87% in 2000, compared to a 20% increase and a 10% decline for the index during the same years. By December 31, 2000, Enron’s stock was priced at $83.13 and its market capitalization exceeded $60 billion, 70 times earnings and six times book value, an indication of the stock market’s high expectations about its future prospects. In addition, Enron was rated the most innovative large company in America in Fortune’s Most Admired Companies survey. Yet within a year, its image was in tatters and its stock price had plummeted nearly to zero. Exhibit 1 lists some of the critical events for Enron between August and December 2001 – a saga of document shredding, restatements of earnings, regulatory investigations, a failed merger, and the company filing for bankruptcy. 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