Management disclosures and financial performance of the firm: A capital markets perspective

With the collapse of Enron, numerous questions have arisen regarding the information management disclosed to the capital markets. Some have asserted that the information management provided was unreliable and thus misleading to the capital markets which caused massive investor and creditor losses. Others however assert that all the necessary information was made available by management but was not appropriately utilized. Were the financial information disclosures provided reliable or simply not relied upon? Moreover, should the existing capital markets research methodology be reconsidered in the wake of the Enron debacle? Finally, what are the salient implications both management and accounting researchers should consider?; I began with a research question that encompassed the reliability of the financial disclosures that were made available to the capital markets. The first hypothesis provided that financial analysis could allow firm differentiation given reliable financial information. After a rigorous financial analysis was performed, the firms within the utility sector of Enron displayed a bimodal clustering into "Enron-Like" and "Non-Enron-Like" groupings.; The next two components of the research question pertained to rationality of the economic actors given asymmetrical information and the efficiency of the capital markets. Given a semi-strong form of market hypothesis as set forth by Fama and a semi-strong form of rationality as set forth by Simon, the capital markets responses were measured. Using a MANOVA, six of the main effects of each disclosure event were found to be significant; however, in three of those events individual ANOVAs were used and found that the price range variable was significant whereas the price variable was not shown as significant. The implications to capital markets research are immense given the voluminous univariate empirical studies that only utilized price as a response variable.; Further, of the six disclosure interaction events only two remained significant. This supports the alternative hypotheses that the capital markets did not consider the available financial information to attenuate the bounding on the existing rationality and thus, in effect, did not fully utilize that financial information management disclosed. Accordingly, Enron may not have been an accounting failure given that the capital markets failed to properly respond.