Financial markets are hit from time to time by bouts of volatility. However by any standards the fall in the Elan share price over the past couple of days has been remarkable. The value of the company has been cut by two-thirds from its high of last month, with the vast bulk of the drop occurring this week.
Why has the fall occurred. First, Elan has been affected by doubts over its accounting policy. In the wake of the Enron debacle, investors are demanding full clarity in the way companies present their figures.Some aspects of Elan's accounting policy are judged as opaque; an article in last Friday's Wall Street Journal highlighted concerns about Elan's accounts, triggering the latest sell-off. A number of other large US companies have been hit by similar concerns.
Second, Elan has warned that the profit outlook for this year is not as good as analysts were forecasting. Coming in the wake of the accountancy concerns - and after its recent suspension of tests on a new drug for Alzheimers disease - this fuelled concerns about the company's profitability and led to a second wave of share selling.
Both the accounting issue and the profit warning were legitimate causes for shareholder concern. However they do not fully explain the latest fall. Either investors were completely wrong in their valuation of Elan's share price a month ago, or they have got it wrong now.
Only time will show the appropriate valuation of Elan shares. However some lessons are clear. The collapse of Enron has crystallised concerns about the way companies count their profitability. Companies now need to ensure that their reported results are clear and understandable.
Investors are no longer prepared to accept accounts that do not clearly show a company's financial position and where its revenue comes from, so that they reach sound judgements. Complex, or what is often called "aggressive", accounting is no longer acceptable. Any suggestion of "off balance-sheet financing" will be met with great suspicion.
With markets nervous after the collapse of Enron, companies that upset investors will be severely punished. This is why Elan has been so severely hit. However it is a company with a solid record of growth and profitability and a clear strategy of developing into a leading pharmaceutical group.
This week's events have been a significant setback, but if the company can restore faith in its accountancy practices and demonstrate that it is developing a strong line of profitable drugs, then it can recover from the latest setback.