In its 2001 annual report, investors of Adelphia Communications were startled to find a footnote in its financial statements that reported the company had guaranteed as much as $2.7 billion in loans to a private entity owned by CEO John Rigas and his family. As a result of the footnote, Adelphia lost more than 50 percent of its market value in little more than a week.
Explain why you think the market value of Adelphia fell so dramatically with the footnote disclosure that the company had guaranteed loans to an entity owned by the company’s CEO and his family.