No Place to Hide

Earlier we noted the stubborn investor paradox exhibited by investors in the years after the Enron Era scandals. In spite of a myriad of accounting and financial misrepresentations or frauds invoving public companies, and even after outright thefts of corporate assets by key managers, public participation in the equity market did not crumble. The Enron Era financial fiascos caused only a very modest public withdrawal from equities. Investors behaved in quite the opposite fashion. As the economy began to recover from the 2001 recession and the tragedy of the 9–11 attack, the rising equity market of 2002–07 attracted increasing investor participation. Despite numerous exposés documenting widespread examples of corporate misgovernance, public participation in equity markets actually expanded! Why weren’t investors thoughtfully suspicious of management statements? Why didn’t they apply heavy discounts to projected forward earnings?What were they leaving out of their evaluations of corporate prospects and likely corporate behavior?