The Bigger They Are, The Harder They Fall: An Estimate of the Costs of the Crisis in Corporate Governance

This study aims to further the public debate and to invite further discussion and research on this topic. The authors welcome further discussion of their results, as well as of alternative approaches for assessing the costs of the coporate scandals. Send your view

This working paper is updated periodically to account for market changes


The two largest bankruptcies in U.S. history, WorldCom in July 2002 and Enron in December 2001, stem from corporate mismanagement, and symbolize the broader crisis in corporate governance. We provide a ballpark estimate of the costs of the crisis, based on conservative estimates of the effects of the crisis on stock market wealth, calibrated according to the Federal Reserve Board?s model of the U.S. economy. Under alternate assumptions, we get a lower limit estimate of $37 billion off GDP in the first year and an upper limit estimate of $42 billion. For comparative purposes, this is in the range of what the federal government spends per year on homeland security, or the increase in the cost of oil imports from a 38% or $10 increase in the per barrel price of crude oil.