fewq Flashcards
What is the fundamental problem damaging contracting efficiency?
Information asymmetry
What is a key agency problem between shareholders and managers?
Moral hazard
Why do creditors charge higher interest rates?
To compensate for excess risk
What role does accounting play in contracting?
Reduces information asymmetry
What is the confirmatory role of net income?
Verifies management’s announcements
How does accounting motivate truthful disclosure?
By confirming prior announcements
What do lenders care most about in financial reporting?
Downside risk
Why is reliability more important to lenders than equity investors?
Lenders face payoff asymmetry
What type of conservatism recognizes losses but delays gains?
Conditional conservatism
What is the role of conservatism in stewardship?
Limits managerial opportunism
What is the Nash Equilibrium in the manager-investor game?
{Refuse, Opportunistic}
What can make a cooperative equilibrium stable in repeated games?
Enforcement mechanisms or penalties
How do regulators change payoffs in the manager-investor game?
By imposing penalties for misreporting
Which performance measure has high sensitivity but low precision?
Share price
Which performance measure has low sensitivity but high precision?
Net income
Why use both net income and share price in compensation?
Balance sensitivity and precision
What is the ‘Big Bath’ in earnings management?
Maximizing future earnings by taking losses now
What motivates income-increasing earnings management?
To maximize bonuses or avoid stock price drop
How can firms manage earnings to meet debt covenants?
Income-increasing discretionary accruals
How do firms use income-decreasing EM to lower political costs?
To qualify for subsidies or reduce taxes
What is Real Activities Manipulation (RAM)?
Altering operations to manipulate earnings
What are examples of RAM?
Cutting R&D, overproduction, accelerating sales
Why is RAM harder to detect than accrual EM?
It involves real business operations
What is a common sign of earnings management?
Non-normal distribution of earnings
Why does fixed salary without monitoring cause shirking?
No incentive tied to performance
