Vertical Information Transmission in Organizations: Evidence from the Enron Corporation

Abstract

Firms' production depends on effective information flows across the organisation, and hierarchies play a crucial role in shaping them. Nevertheless, there is little empirical evidence on how information moves across hierarchies. In this paper, I exploit a unique panel dataset of emails from the Enron Corporation to explain the role of vertical communication in information flows. I find that vertical communication was meant to either move information up the hierarchy or delegate tasks down, suggesting that subordinates were generally in charge of information acquisition, whereas superiors retained decision rights. In addition, emails are more precise when directed to superiors rather than when sent to subordinates. This evidence supports the incentive-theory perspective on communication. However, an event study around the sudden resignation of the CEO shows that superiors gain a more important role in providing information in moments of crisis. This result suggests that higher-ranked roles hold more complex knowledge and help subordinates in challenging times, consistent with the knowledge-based view of hierarchies. Finally, I find that higher-ranked employees have broader languages, particularly when providing information, suggesting broader communication across the firm. Overall, the paper provides real-data evidence that incentive theories and team theories may complement each other in explaining the communication flows within firms.