Describe the determinants of corporate failures, Corporate Finance

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Professor Steward Hamilton wrote a case on the Enron collapse. He stated that when Enron failed and filed for bankruptcy protection on December 2001, the entair world came to a shock. Everyone was wondering that how such a high profile and world leader company could have failed? Many employees of Enron found themselves devastated since they had invested their retirement and savings into the Enron shares. Not only did they run into financial ruin, they lose their jobs as well. Enron which employed 25000 people worldwide was the 7th largest company in the United States revenue wise and was also one of the most admired company in the United States. Its high performance was often cited in various business school cases. Thus, as more and more facts emerged, it soon become evident that the company had several elements of a ‘ponzi' scheme. In view of maintaining the share price of the company it was evident to show sustained growth and this was achieved through the use of ‘aggressive' accounting policies which enhanced profits. Some other accounting practice was to move assets and liabilities off the Balance Sheet.

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One of the prevalent concerns in the present times, for both academics and practitioners and management, relates to the principles which evaluate corporate successes and failures. Describe the various determinants of corporate failures.


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