General Electric Corp. (GE) is a large and complex United States-based conglomerate, with operations extending from industrial and medical equipment to aircraft leasing and mortgage lending, its share price fell considerably during 2000-2002, following the Enron scandal and resulting stock market collapse and economic recession. This fall occurred despite there being no evidence that GE had engaged in any irregular account- ing practices GE adopted a number of strategies to halt and reverse its share price decline. Several of these strategies involved increased disclosure. GE'S CEO was quoted as saying "If the annual report has to be the size of the New York City phone book, that's life." For example, GES 2001 annual report, issued in March 2002, disclosed separate revenue and operating profits for 26 of its business segments, up from 12 segments previously. The company also provided extensive discussion of its SPES, in view of the abuses of these off- balance entities by Enron. It disclosed that none of its SPES were allowed to hold GE stock, and that none of them engaged in speculative activities, or were used to hedge any of GES operations Furthermore, GE employees were not allowed to invest in any of its SPES Also, the CEO reaffirmed the firm's 2002 earnings forecast, and GE began providing quarterly conference calls and webcasts, available to analysts and investors, to answer questions and provide additional information about its earnings announcements GE also announced in 2002 that it would voluntarily begin to record options to employees (ESO) as an expense. (An FASB standard requiring expensing of ESOS did not come into effect until 2005)

Required

a. Give reasons why GE's share price fell during 2001-2002. Give reasons why increased disclosure exerts upwards influence on a firm's share price.

b. Evaluate the likely effects of GES SPE disclosures, increased earnings announcement disclosures, and its early adoption of ESO expensing on its share price

c. Despite GE's increased segment disclosure, numerous analysts and investors were concerned that the company's increased disclosure did not extend to reporting how much of its consolidated earnings came from the earnings of new subsidiaries and how much from previously acquired ones. The source of these concerns appeared to be GES practice of "buying earnings" by acquiring profitable companies whose earnings. exceeded the cost of financing the acquisitions (see Chapter 11, question 9). To what extent will GE's increased segment disclosures reduce investor concerns about low transparency of GE's financial reporting?