ferkw Flashcards
What assumption does efficient contracting theory make about managers?
They are rational and self-interested
What is the goal of an efficient contract?
Accomplish objectives at lowest cost to firm and stakeholders
What is a common agency problem in efficient contracting?
Conflict of interest between managers and stakeholders
What fundamental issue damages contracting efficiency?
Information asymmetry
What is moral hazard in contracting?
Shareholders can’t observe if managers are working hard
Why do creditors charge higher interest rates?
To compensate for unknown asset risks
What role does accounting play in reducing information asymmetry?
Provides reliable information to contracting parties
How does net income contribute to stewardship?
It confirms or disconfirms management forecasts
What financial reporting role motivates truthful announcements?
The confirmatory role of net income
Who demands early warnings of financial distress?
Lenders
Why do lenders prefer reliable information over relevant information?
They are more concerned with downside risk
What is conditional conservatism?
Recognizing losses early but deferring gains
Why do shareholders prefer conservative accounting?
To discourage opportunistic managerial behavior
What is an implicit contract?
Trust-based relationship from repeated interactions
How can a firm benefit from high-quality financial reporting?
Lower borrowing costs and higher product prices
What is a non-cooperative game in accounting?
Interaction without formal contracts, based on rational behavior
What is a Nash Equilibrium in the manager-investor game?
{Refuse, Opportunistic} outcome
How can {Buy, Honest} become a stable outcome in game theory?
Use repeated games and enforce penalties
What causes the agency problem?
Separation of ownership and control
Why might a manager shirk?
Effort is costly and not directly observable
What is the outcome of paying a fixed salary to a manager?
Manager may shirk due to lack of performance incentive
What is direct monitoring?
Owner observes effort and adjusts pay accordingly
What is indirect monitoring?
Owner uses output signals to infer effort
What happens when the manager rents the firm?
Manager works, but owner earns less — higher agency cost
