Unlike in structural and reduced-form models, we use equity as a liquid and observable primitive to analytically value corporate bonds and credit default swaps.Restrictive assumptions on the .rm.s capital structure are avoided.Default is parsimoniously represented by equity value hitting the zero barrier either diffusively or with a jump, which implies non-zero credit spreads for short maturities.Easy cross-asset hedging is enabled.By means of a tersely speci.ed pricing kernel, we also make analytic credit-risk management possible under systematic jump-to-default risk.
{"title":"Assessing Credit with Equity: A Cev Model with Jump to Default","authors":"A. Sbuelz, L. Campi, S. Polbennikov","doi":"10.2139/ssrn.675061","DOIUrl":"https://doi.org/10.2139/ssrn.675061","url":null,"abstract":"Unlike in structural and reduced-form models, we use equity as a liquid and observable primitive to analytically value corporate bonds and credit default swaps.Restrictive assumptions on the .rm.s capital structure are avoided.Default is parsimoniously represented by equity value hitting the zero barrier either diffusively or with a jump, which implies non-zero credit spreads for short maturities.Easy cross-asset hedging is enabled.By means of a tersely speci.ed pricing kernel, we also make analytic credit-risk management possible under systematic jump-to-default risk.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126703376","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the influence of the ex ante risk of class action securities litigation on firms' decisions to issue management earnings forecasts as well as the characteristics of those forecasts. We find that litigation risk is positively associated with the likelihood of issuing a forecast for both good- and bad-news firms. While the association is marginally stronger for firms with bad earnings news, our results suggest that litigation risk is unlikely to explain the observed preponderance of bad-news forecasts. We examine the effect of litigation risk on the amount of the total earnings news released in the forecast, on forecast horizon, and on forecast precision. These results indicate that higher litigation risk is associated with a higher proportion of news being released when firms have bad news. Finally, higher litigation risk is associated with forecasts being released earlier and being more precise.
{"title":"Management Forecasts and Litigation Risk","authors":"Stephen J. Brown, Stephen A. Hillegeist, Kin Lo","doi":"10.2139/ssrn.709161","DOIUrl":"https://doi.org/10.2139/ssrn.709161","url":null,"abstract":"We examine the influence of the ex ante risk of class action securities litigation on firms' decisions to issue management earnings forecasts as well as the characteristics of those forecasts. We find that litigation risk is positively associated with the likelihood of issuing a forecast for both good- and bad-news firms. While the association is marginally stronger for firms with bad earnings news, our results suggest that litigation risk is unlikely to explain the observed preponderance of bad-news forecasts. We examine the effect of litigation risk on the amount of the total earnings news released in the forecast, on forecast horizon, and on forecast precision. These results indicate that higher litigation risk is associated with a higher proportion of news being released when firms have bad news. Finally, higher litigation risk is associated with forecasts being released earlier and being more precise.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"71 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126713583","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores a firm's reliance on internal and external governance mechanisms, recognizing that the choice of one instrument relative to the other is itself part of the governance policy of the firm. Starting from the premise that firms' disclosure policies can foster external scrutiny and takeover activity we show that such external instruments then become substitutes for internal monitoring and restructuring. We also argue that, since technological progress affects the returns to internal and external information acquisition, its incidence on firms' disclosure policy drives the relative effectiveness of the two governance mechanisms. Specifically, we show that improvements in dissemination technology lead to more disclosure and more successful external governance, but less board monitoring and internal restructuring. By contrast, general advances affecting information processing have the opposite effect unless they only enhance internal processing capabilities such as performance measurement and reporting systems, in which case they increase voluntary disclosure. We also find that firms' disclosure policies fall short of the social optimum, thus providing a rationale for regulation that sets and enforces minimal disclosure standards. Our results are robust to the introduction of agency conflicts between shareholders and their boards, although divergent interests reduce the overall effectiveness of technological advances in fostering good governance. Throughout we discuss empirical implications and lessons for the design of corporate-governance arrangements.
{"title":"Governance Mechanisms, Corporate Disclosure, and the Role of Technology","authors":"Robert Hauswald, R. Marquez","doi":"10.2139/ssrn.687138","DOIUrl":"https://doi.org/10.2139/ssrn.687138","url":null,"abstract":"This paper explores a firm's reliance on internal and external governance mechanisms, recognizing that the choice of one instrument relative to the other is itself part of the governance policy of the firm. Starting from the premise that firms' disclosure policies can foster external scrutiny and takeover activity we show that such external instruments then become substitutes for internal monitoring and restructuring. We also argue that, since technological progress affects the returns to internal and external information acquisition, its incidence on firms' disclosure policy drives the relative effectiveness of the two governance mechanisms. Specifically, we show that improvements in dissemination technology lead to more disclosure and more successful external governance, but less board monitoring and internal restructuring. By contrast, general advances affecting information processing have the opposite effect unless they only enhance internal processing capabilities such as performance measurement and reporting systems, in which case they increase voluntary disclosure. We also find that firms' disclosure policies fall short of the social optimum, thus providing a rationale for regulation that sets and enforces minimal disclosure standards. Our results are robust to the introduction of agency conflicts between shareholders and their boards, although divergent interests reduce the overall effectiveness of technological advances in fostering good governance. Throughout we discuss empirical implications and lessons for the design of corporate-governance arrangements.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128983622","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Ariel Markelevich, Rani Hoitash, Charles A. Barragato
Our study examines fees paid to auditors for audit and non-audit services during the period 2000 to 2003. We document a statistically significant positive association between audit fees and the absolute value of performance-adjusted discretionary accruals over all years. We also identify a significant positive association between non-audit fees and discretionary accruals in years 2000 and 2001, but no such association in later years (after passage of the Sarbanes-Oxley Act). This lack of association in 2002 and 2003 may be a result of legislation that limits the types of non-auditing services that auditors can provide to audit clients. To address the potential impact of fee composition and client importance on auditor independence, we extend our empirical analysis by incorporating predictions of abnormal audit and non-audit fees. We derive abnormal fees using a fee estimation model drawn from prior literature. We find evidence consistent with the view that clients with higher abnormal fees are more apt to exert influence on their auditors, which in turn may lead to a breach in auditor independence. Overall, our results are most consistent with economic bonding being the primary determinant of auditor behavior.
{"title":"Auditor Fees, Abnormal Fees and Audit Quality Before and after the Sarbanes-Oxley Act","authors":"Ariel Markelevich, Rani Hoitash, Charles A. Barragato","doi":"10.2139/ssrn.646681","DOIUrl":"https://doi.org/10.2139/ssrn.646681","url":null,"abstract":"Our study examines fees paid to auditors for audit and non-audit services during the period 2000 to 2003. We document a statistically significant positive association between audit fees and the absolute value of performance-adjusted discretionary accruals over all years. We also identify a significant positive association between non-audit fees and discretionary accruals in years 2000 and 2001, but no such association in later years (after passage of the Sarbanes-Oxley Act). This lack of association in 2002 and 2003 may be a result of legislation that limits the types of non-auditing services that auditors can provide to audit clients. To address the potential impact of fee composition and client importance on auditor independence, we extend our empirical analysis by incorporating predictions of abnormal audit and non-audit fees. We derive abnormal fees using a fee estimation model drawn from prior literature. We find evidence consistent with the view that clients with higher abnormal fees are more apt to exert influence on their auditors, which in turn may lead to a breach in auditor independence. Overall, our results are most consistent with economic bonding being the primary determinant of auditor behavior.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-02-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126428723","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Risk reporting is an emerging reporting challenge in Europe. Current literature assumes corporate risk reporting to be informative for its users. The purpose of this paper is to investigate in how far risk disclosures can meet the information function alleged. Embedded in frameworks of economics of information and of risk management, a substantial review and discussion of discretionary disclosure models, including cheap talk-models, provides a sound basis for assessing the information value provided by risk reports. The results are manifold. First, the review highlights strong incentives for discretion and manipulation by the manager who can use the report as a measure of handling derivative risks. These margins particularly stem from the uncertainty of availability and the non-verifiability of risk information. Second, the review exposes regulative implications to assist the information function of risk reporting. Those include the need for comparable reporting repelling a pure management approach, and for supplemental information on corporate risk management. Third, the discussion qualifies common arguments concerning risk reporting. E.g., the ex post nominal/actual value comparison is inappropriate to assess credibility, the fear of self-fulfilling prophecies does not reason opt-out clauses. However, the alerting main result of the paper is that, even in a regulated accounting environment, the information value of risk reports must not be overestimated.
{"title":"How Informative is Risk Reporting? - a Review of Disclosure Models","authors":"M. Dobler","doi":"10.2139/ssrn.640522","DOIUrl":"https://doi.org/10.2139/ssrn.640522","url":null,"abstract":"Risk reporting is an emerging reporting challenge in Europe. Current literature assumes corporate risk reporting to be informative for its users. The purpose of this paper is to investigate in how far risk disclosures can meet the information function alleged. Embedded in frameworks of economics of information and of risk management, a substantial review and discussion of discretionary disclosure models, including cheap talk-models, provides a sound basis for assessing the information value provided by risk reports. The results are manifold. First, the review highlights strong incentives for discretion and manipulation by the manager who can use the report as a measure of handling derivative risks. These margins particularly stem from the uncertainty of availability and the non-verifiability of risk information. Second, the review exposes regulative implications to assist the information function of risk reporting. Those include the need for comparable reporting repelling a pure management approach, and for supplemental information on corporate risk management. Third, the discussion qualifies common arguments concerning risk reporting. E.g., the ex post nominal/actual value comparison is inappropriate to assess credibility, the fear of self-fulfilling prophecies does not reason opt-out clauses. However, the alerting main result of the paper is that, even in a regulated accounting environment, the information value of risk reports must not be overestimated.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129617095","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Criminal prosecution of financial reporting-related corporate misconduct is generally acknowledged to be sometimes warranted. The decision to seek an indictment of Arthur Andersen remains controversial, however. Eisenberg and Macey (2004) posit that because the resulting increased concentration (from the Big Five to the Big Four) in the large public company auditing services market was detrimental to consumers of auditing services, criminal prosecution of Arthur Andersen can only be justified if empirical evidence is provided that indicates that Arthur Andersen was a lower quality auditor than the surviving Big Four. In my analysis of 1125 auditees of their litigation commenced 1996 through 2002, I find empirical evidence that the auditor quality of Arthur Andersen was lower than that of the surviving Big Four CPA firms. This finding suggests that there was justification for the exercise of the prosecutorial discretion of the United States Department of Justice in seeking an indictment of Arthur Andersen.
{"title":"Differentiating between Arthur Andersen and the Surviving Big Four on the Basis of Auditor Quality: An Empirical Investigation of the Decision to Criminally Prosecute Arthur Andersen","authors":"Ross D. Fuerman","doi":"10.2139/ssrn.639644","DOIUrl":"https://doi.org/10.2139/ssrn.639644","url":null,"abstract":"Criminal prosecution of financial reporting-related corporate misconduct is generally acknowledged to be sometimes warranted. The decision to seek an indictment of Arthur Andersen remains controversial, however. Eisenberg and Macey (2004) posit that because the resulting increased concentration (from the Big Five to the Big Four) in the large public company auditing services market was detrimental to consumers of auditing services, criminal prosecution of Arthur Andersen can only be justified if empirical evidence is provided that indicates that Arthur Andersen was a lower quality auditor than the surviving Big Four. In my analysis of 1125 auditees of their litigation commenced 1996 through 2002, I find empirical evidence that the auditor quality of Arthur Andersen was lower than that of the surviving Big Four CPA firms. This finding suggests that there was justification for the exercise of the prosecutorial discretion of the United States Department of Justice in seeking an indictment of Arthur Andersen.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132495984","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops and tests a model of how country characteristics, such as legal protections for minority investors, and the level of economic and financial development, influence firms' costs and benefits in implementing measures to improve their own governance and transparency. The model focuses on an entrepreneur who needs to raise funds to finance the firm's investment opportunities and who decides whether or not to invest in better firm-level governance mechanisms to reduce agency costs. We show that, for a given level of country investor protection, the incentives to adopt better governance mechanisms at the firm level increase with a country's financial and economic development. When economic and financial development is poor, the incentives to improve firm-level governance are low because outside finance is expensive and the adoption of better governance mechanisms is expensive. Using firm-level data on international corporate governance and transparency ratings for a large sample of firms from around the world, we find evidence consistent with this prediction. Specifically, we show that (1) almost all of the variation in governance ratings across firms in less developed countries is attributable to country characteristics rather than firm characteristics typically used to explain governance choices, (2) firm characteristics explain more of the variation in governance ratings in more developed countries, and (3) access to global capital markets sharpens firm incentives for better governance, but decreases the importance of home-country legal protections of minority investors.
{"title":"Why Do Countries Matter so Much for Corporate Governance?","authors":"Craig Doidge, G. Karolyi, René M. Stulz","doi":"10.2139/ssrn.580883","DOIUrl":"https://doi.org/10.2139/ssrn.580883","url":null,"abstract":"This paper develops and tests a model of how country characteristics, such as legal protections for minority investors, and the level of economic and financial development, influence firms' costs and benefits in implementing measures to improve their own governance and transparency. The model focuses on an entrepreneur who needs to raise funds to finance the firm's investment opportunities and who decides whether or not to invest in better firm-level governance mechanisms to reduce agency costs. We show that, for a given level of country investor protection, the incentives to adopt better governance mechanisms at the firm level increase with a country's financial and economic development. When economic and financial development is poor, the incentives to improve firm-level governance are low because outside finance is expensive and the adoption of better governance mechanisms is expensive. Using firm-level data on international corporate governance and transparency ratings for a large sample of firms from around the world, we find evidence consistent with this prediction. Specifically, we show that (1) almost all of the variation in governance ratings across firms in less developed countries is attributable to country characteristics rather than firm characteristics typically used to explain governance choices, (2) firm characteristics explain more of the variation in governance ratings in more developed countries, and (3) access to global capital markets sharpens firm incentives for better governance, but decreases the importance of home-country legal protections of minority investors.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"107 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122745242","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We contribute to the literature on Regulation Fair Disclosure (FD) in three ways. First, we provide evidence on whether FD has achieved its intended effect of leveling the information playing field by examining whether differences across investors' information quality prior to earnings announcements have declined after the pronouncement of the regulation. We find strong evidence of a decline in earnings announcement period trading volume attributable to differential prior precision after FD consistent with a more level playing field. Second, we re-examine whether FD has resulted in firms reducing or chilling their information flows (disclosures) to investors. Contrary to prior work, we find that there is evidence of an overall reduction or chill in information flows after FD relative to a "cleaner" pre-FD period than the pre-FD period used in other studies. Third, we document that while the leveling effect of FD is relatively wide-spread, the chill effect is driven by (i) relatively smaller, high technology firms and (ii) relatively larger firms with high book-to-market ratios. We interpret the latter result as evidence that firms with relatively high costs of public disclosure chose to eliminate the disclosure altogether rather than broadening access to the disclosure.
{"title":"Did Regulation Fair Disclosure Level the Playing Field? Evidence from an Analysis of Changes in Trading Volume and Stock Price Reactions to Earnings Announcements","authors":"Anwer S. Ahmed, Richard A. Schneible Jr.","doi":"10.2139/ssrn.498002","DOIUrl":"https://doi.org/10.2139/ssrn.498002","url":null,"abstract":"We contribute to the literature on Regulation Fair Disclosure (FD) in three ways. First, we provide evidence on whether FD has achieved its intended effect of leveling the information playing field by examining whether differences across investors' information quality prior to earnings announcements have declined after the pronouncement of the regulation. We find strong evidence of a decline in earnings announcement period trading volume attributable to differential prior precision after FD consistent with a more level playing field. Second, we re-examine whether FD has resulted in firms reducing or chilling their information flows (disclosures) to investors. Contrary to prior work, we find that there is evidence of an overall reduction or chill in information flows after FD relative to a \"cleaner\" pre-FD period than the pre-FD period used in other studies. Third, we document that while the leveling effect of FD is relatively wide-spread, the chill effect is driven by (i) relatively smaller, high technology firms and (ii) relatively larger firms with high book-to-market ratios. We interpret the latter result as evidence that firms with relatively high costs of public disclosure chose to eliminate the disclosure altogether rather than broadening access to the disclosure.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"182 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-01-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121149105","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
One of the most powerful mechanisms by which governments and corporations can raise capital is by offering securities to the public without an underwriter through a direct public offering (DPO). Although governments at all levels have conducted DPOs, corporations generally have not adopted the DPO as a means of financing the corporation. This paper contends that DPOs can be a more efficient means of raising capital than conventional offerings. In particular, aggregate transaction costs in a DPO are likely to be lower in certain circumstances such as when: an offering is conducted over the Internet; the issuer is seasoned; investors are sophisticated; and, the offering is debt rather than equity securities. The presence of each of these factors can result in lower information costs and thereby increase the potential for an efficient DPO.
{"title":"The Efficiency of Direct Public Offerings","authors":"A. Anand","doi":"10.2139/SSRN.394304","DOIUrl":"https://doi.org/10.2139/SSRN.394304","url":null,"abstract":"One of the most powerful mechanisms by which governments and corporations can raise capital is by offering securities to the public without an underwriter through a direct public offering (DPO). Although governments at all levels have conducted DPOs, corporations generally have not adopted the DPO as a means of financing the corporation. This paper contends that DPOs can be a more efficient means of raising capital than conventional offerings. In particular, aggregate transaction costs in a DPO are likely to be lower in certain circumstances such as when: an offering is conducted over the Internet; the issuer is seasoned; investors are sophisticated; and, the offering is debt rather than equity securities. The presence of each of these factors can result in lower information costs and thereby increase the potential for an efficient DPO.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-10-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129498566","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This chapter makes two points about the academic and regulatory reaction to Enron’s collapse. First, it argues that what emerged as the ‘conventional story’ of Enron, involving alleged fraud related to special purpose entities (SPEs), was incorrect. Instead, this chapter makes the revisionist claim that Enron was largely a story about derivatives — financial instruments such as options, futures and other contracts whose value is linked to some underlying financial instrument or index (see Box 3.1). A close analysis of the facts shows that the most prominent SPE transactions were largely irrelevant to Enron’s collapse, and that most of Enron’s deals with SPEs were arguably legal, even though disclosure of those deals was not compatible with economic reality (Partnoy, 2002).3 To the extent SPEs are relevant to understanding Enron, it is the derivatives transactions between Enron and the SPEs — not the SPEs themselves — that matter. Even more important were Enron’s derivatives trades and transactions other than those involving the SPEs. This first point about derivatives is important to the literature studying the relationship between finance and law: legal rules create incentives for parties to engage in economically equivalent unregulated transactions, and financial innovation creates incentives for parties to increase risks (to increase expected return) outside the scope of legal rules requiring disclosure.4
{"title":"A Revisionist View of Enron and the Sudden Death of 'May'","authors":"Frank Partnoy","doi":"10.2139/ssrn.417261","DOIUrl":"https://doi.org/10.2139/ssrn.417261","url":null,"abstract":"This chapter makes two points about the academic and regulatory reaction to Enron’s collapse. First, it argues that what emerged as the ‘conventional story’ of Enron, involving alleged fraud related to special purpose entities (SPEs), was incorrect. Instead, this chapter makes the revisionist claim that Enron was largely a story about derivatives — financial instruments such as options, futures and other contracts whose value is linked to some underlying financial instrument or index (see Box 3.1). A close analysis of the facts shows that the most prominent SPE transactions were largely irrelevant to Enron’s collapse, and that most of Enron’s deals with SPEs were arguably legal, even though disclosure of those deals was not compatible with economic reality (Partnoy, 2002).3 To the extent SPEs are relevant to understanding Enron, it is the derivatives transactions between Enron and the SPEs — not the SPEs themselves — that matter. Even more important were Enron’s derivatives trades and transactions other than those involving the SPEs. This first point about derivatives is important to the literature studying the relationship between finance and law: legal rules create incentives for parties to engage in economically equivalent unregulated transactions, and financial innovation creates incentives for parties to increase risks (to increase expected return) outside the scope of legal rules requiring disclosure.4","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-06-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127176561","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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