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| Is Share Price a Measure of Financial Performance: Evidence from Enron Corporation
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Robert Odek, Elmad Okoth, Dr. Kalundu Kimanzi
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Abstract:
Purpose: This is a qualitative study that reviewed empirical literature in regard to the role of share price as a predictor of company financial performance. Methodology: Systematic Approach utilizing meta-synthesis in the analysis of 23 publications was applied in this study. Findings: The study discloses that share price is not an exact measure of company financial performance. It was evidenced that other factors including; rumours, analysts forecast, and earnings management influences company value and financial performance which then translates to misleading share price. Investors have frequently utilized rumour in making investment decisions. Besides, there is a positive relationship between stock market analysts and share price. Analysis has also shown that companies engage in creative accounting with the view of increasing the reported earnings which then influences share price. These empirical findings are practically confirmed in Enron where maintaining a strong and generally growing company stock price was the strategy. To meet analyst expectations, Enron Corporation engaged in several unethical accounting practices so as to communicate better earnings which were though misleading. Enron Corporation applied professional judgment by creating special purpose entities which were utilized in transferring part of the liabilities off the books. Enron Corporation also adopted market to market accounting practices which allowed reporting of income and value of assets at their replacement costs thus ignoring depreciation expense and inflating the earnings which translated to a high share price. Enron formed off balance sheet partnerships in 1991 which were then utilized as an avenue to conceal money losing ventures. Enron Corporation blatantly showed profits on its books with an aim of increasing share price even though this was really misleading and this is confirmed in 1999 when Enron's Assets inflated. Enron Compromises to repay Merrill Lynch's investment with interest in order to show a profit on its books to inflate share price. Implications: This study confirms that even though share price ought to reflect the true company value, it does not. The findings can therefore be utilized by stakeholders and investors at large in making investment decision and in comprehension that share price can at times be really misleading despite how highly priced it may be. Value of the Study: The study contributes to investment decision making to various stockholders and potential investors who are willing to invest in companies trading in shares. It also forms a basis for further study utilizing the results of meta-synthesis. That is, other studies may measure rumours in terms of heard on the street, and irregular information. While stock analysts may be measured as analysts' recommendations. Earnings management can be viewed in line with accrual anomaly and company book value.
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