and thus have become cheerleaders for firms rather than
questioning analysts.
Itistheresponsibilityofanalyststodemandinformationthat
theyfeeliscritical inassessingthevalueofthefirmsthey
follow. For instance, analysts following a firm with
substantial cross holdings are right to demand enough
informationaboutthesecrossholdingstovaluethem.Ifthe
informationis not forthcoming,they haveto be willingto
highlight this failure and use it as a justification for
downgradingthefirm.Clearly,ifenoughanalystsdemanded
theinformation,thefirmwouldfindawaytoprovideitor
risk serious punishment in the market.
36
As investors, it is easy to blame loose laws, incompetent
auditors,andsnoozinganalystsforcomplexcompanies that
turnintoinvestmentdisasters.However,weshouldrecognize
thatwebearasubstantialresponsibilityforourfailures,since
wedonothavetobuystocksthatanalystsrecommend.If,as
investors,werefusedtobuystockincompanieswithcomplex
financial statements (hence discounting value for
complexity),weareprovidingtheultimateincentiveforfirms
to eliminate or at least reduce complexity.
Stronger Corporate Governance
ThekeylessonoftheEnrondebacleshouldbethatastrong
and independent board is the best defense against firms
manipulating earnings and hiding relevant facts from the
market.Itshouldforceinstitutionalinvestorswhohavebeen
onthesidelinesofthisdebatetobemuchmoreactivistand
pushforchangesincorporategovernance.Inparticular,they