NCPA - National Center for Policy Analysis

Let The Market Punish Corporate Miscreants

July 23, 2002

Politicians are racing around Washington giving the appearance of solving the corporate accounting scandal. But the capital markets are perfectly capable of disciplining their own.

  • Around the world, markets are crushing the shares and bonds of companies whose numbers are suspicious.
  • Senior executives are dropping like flies as boards revolt over the collapse of their securities -- with Tyco's CEO long gone, Bristol-Myers's leader on thin ice and Merck being forced to cancel a $5 billion subsidiary financing.
  • While phony managerial and financial behavior is often tolerated by shareholders and creditors longer than logic would dictate, the pendulum eventually swings and investors reject unconscionable behavior.
  • The market is even capable of discouraging the use of perfectly legal accounting contortions to make corporate books look more robust than they really are -- witness the $1.41 trillion in value that has been expunged from U.S. stocks in the past two weeks alone.

Painful as it may be, the capital markets are better at disciplining corporate America than the U.S. legal and regulatory system -- notwithstanding the fact that certain new laws might make sense, critics suggest.

These might include punishing corporate accounting fraud through requirements that CEOs and CFOs attest to the accuracy of financial statements, requiring a majority of truly outside directors on any public board, requiring audit committees to consist only of outside directors and requiring the expensing of stock options.

Source: Roger C. Altman (Evercore Partners), "The Market Punishes Its Own," Wall Street Journal, July 23, 2002.

For WSJ text,,SB1027377816917225160,00.html


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