Incentive In Capital Markets Flashcards
What are possible benefits of providing more disclosure?
Reducing information asymmetry, preempting litigation, deterring competitors.
What are possible costs of providing more disclosure?
Information collection, processing, and dissemination costs, revealing proprietary information to competitors, attracting litigation when optimistic prediction is not met, attracting unwanted political attention.
What is a reason firms provide more disclosure?
Managers have something for hype!
What is a reason firms provide less disclosure?
Managers have something to hide…
What pattern do managers tend to follow regarding information disclosure?
Managers tend to disclose favorable information but withhold unfavorable information.
This pattern is backed by numerous academic studies.
Why do accounting standards allow for flexibility in financial reporting?
To give managers room to report numbers reflecting the economic fundamentals.
What is a potential issue with flexibility in financial reporting?
Flexibilities can be exploited by opportunistic behaviors in the name of ‘reflecting economic fundamentals’.
What is a key element in understanding financial reporting?
To separate the explanations of reflecting economic fundamentals and opportunistic behaviors.
What are the most important incentives to manipulate earnings?
To influence stock prices, to hit benchmark because of outside pressures, to hit benchmark because of inside pressures, to influence executive compensation, to avoid violation of debt covenants, etc.
What is one reason companies misreport earnings?
To influence stock prices
What is a benchmark-related reason for misreporting earnings?
To hit benchmark because of outside pressures
What is an internal pressure that can lead to earnings manipulation?
To hit benchmark because of inside pressures
How can executive compensation be affected by earnings manipulation?
To influence executive compensation
What is a financial obligation that can motivate earnings misreporting?
To avoid violation of debt covenants
Who pays sell-side analysts?
Sell-side analysts are paid indirectly by brokers who charge trading commissions from institutional clients.
What is a key information source for sell-side analysts?
Managers are one key information source for sell-side analysts.
How can allowing sell-side analyst owning shares affect analysts’ optimism?
Allowing analysts to own shares could potentially make them less optimistic.
What is the focus of the ‘Analyst ownership’ paper?
The paper investigates whether there are wide-spread violations of regulation by sell-side analysts.
Who is associated with the ‘Analyst ownership’ paper?
The paper is associated with McGill and D Desai.
