The Enron bankruptcy scandal is a great example of the Mishkin’s concerns about asymmetric information problems. The key reason of the Enron scandal was that the management knew about huge financial losses of the company, but with help of various loopholes in accounting and poor financial reporting, top managers succeeded in hiding billions of dollars of financial losses and failed projects. This has created a situation characterized by the availability of asymmetric information, described by Frederic S. Mishkin in all the details. Enron was one of the largest and known audit companies in the world, and other top companies used their services on a regular basis, as they did not know about significant financial losses of Enron Company (“The Real Scandal”).
Selecting a company without knowing all the facts about its financial state is the problem known as adverse selection. Adverse selection is a result of asymmetric information, and they both lead to the good credit rationing of these companies, as the banks do not know about the financial issues (“Adverse Selection”).
Some Enron managers had a superior information compared to the information that was shared with banks and shareholders of the company. This is why the situation when top managers were hiding some facts and destroying documents that could prove the poor financial state of the company is called an asymmetric information problem. Such situations often happen in the securities market, as companies know more about some details of their performance, and when this news is shared with some people and other people do not have an access to this information, it leads to the adverse selection of securities.
Thus, the Enron scandal is a great example of the Mishkin’s concerns about asymmetric information, and an example of what can happen when certain facts are hidden from the shareholders and partners of big companies.
“Adverse Selection”. (n.d.). Investopedia.com. Web. 1 May 2016. <http://www.investopedia.com/terms/a/adverseselection.asp>
“The Real Scandal”. (2002). Economist. Web. 1 May 2016. <http://www.economist.com/node/940091>