|
Counting the cost of corporate scandals
Washington, 24 September 2002
The crisis in corporate governance stemming from the Enron and WorldCom scandals will cost the US economy $35 billion in a year, or 0.34 per cent off gross domestic product, according to a new report from the Brookings Institution. That is as much as a $10 rise in the per barrel price of oil.
The study bases its findings on recent trends in the stock market. Caroline Graham, director of governance studies at the Washington think-tank, attributes the drop in the market value to the wave of corporate scandals and the resulting erosion of investor confidence. "It hinges on companies misreporting their earnings, thereby skewing the price-earnings ratio, a measure which is at the core of most decisions investors make", she said.
Declines in stock value have a depressing effect on consumption and increase cost of equity capital, thus reducing investment. Should stocks stay at their level, the impact of the scandals would cost between 1.05 and 2.50 percent off the economy over the next ten years, according to the report's findings. Moreover, the scandals seem to have discouraged foreign investment. But here, the resulting drop in the dollar can be seen as one of the few welcome effects of the scandals.
The authors question how long it will take to restore confidence, reverse the trend and eventually overcome the adverse effects of the corporate crisis. They say the market's imperviousness to President Bush and Fed Chairman Greenspan's addresses, shows that investors are adopting a "wait and see" attitude towards the reforms. As the authors put it, "they want more than words".
Click here for the Brookings Institution's full report "The Bigger They Are The Harder They Fall: An Estimate of the Cost of the Crisis in Corporate Governance"
| 
