Document Type

Article

Publication Date

2004

Center/Program

Center on Corporate Governance

Center/Program

Center for Law and Economic Studies

Abstract

Securities markets have long employed "gatekeepers"-independent professionals who pledge their reputational capital-to protect the interests of dispersed investors who cannot easily take collective action.1 The clearest examples of such reputational intermediaries are auditors and securities analysts, who verify or assess corporate disclosures in order to advise investors in different ways. But during the late 1990s, these protections seemingly failed, and a unique concentration of financial scandals followed, all involving the common denominator .of accounting irregularities. What caused this sudden outburst of scandals, involving an apparent epidemic of accounting and related financial irregularities, that broke over the financial markets between late 2001 and mid-2002--e.g., Enron, WorldCom, Global Crossing, Tyco, and others? To date, much commentary has broadly and loosely attributed these scandals to any or all of a number of circumstances: (1) a stock market bubble; (2) a decline in business morality; (3) weak boards of directors;2 or (4) an increase in "infectious greed."'3 Without denying that any of these factors could have played some role, this article begins from the premise that explanations phrased in terms of greed and morality are unsatisfactory because they depend on subjective trends that cannot be reliably measured.

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