803 Question 1 Essay

Submitted By John-Yorksten
Words: 1843
Pages: 8

Cells with line through it are words that i don’t think will be on the exam
Bold cells have been defined below
Chapter 8
Chapter 9

stewardship role game theory/economic theroy of games risk-sharing economic consequences-- conflict informaiton asymmetry positive accounting theory agency theory moving support employee stock options contrcting fixed support grant date employment contracts internalizing intrisic value cooperative game performance measure expiry date binding agreement internalizing vesting date constituencies performance measure nexus of contracts non-cooperative game informative contracting costs startegy pair message opportunistic behavior nash equilibrium second-best choice efficient contracts cooperative solution incentive-compatability managers are rational nature pre-contract information normative cooperative behavior aligned interests bonus plan hypothesis contracts pre-decision information debt covenant hypohtesis lending contracts post-decision information politicial cost hypothesis work hard or shirk choice revelation principle income escalator clause managerial labour market sensitivity discretionary accurals reservation utility precision total accurals effort-averse incomplete contracts

first-best solution complete contract

Chapter 10
Chapter 11 chapter 12 executive compensation plans earnings management regulator reputation taking a bath first-best amount of information produciton long-run effort income minimization standard setting short-run effort income maximization two types of information (propiretary and non-proprietary) congruency of a performance measure income smoothing finer information congruent to the payoff bonus schemes additional information noncongruent to the payoff piecewise linear credibitliy relative perfomrance evaluation implicit contracts information production restricted stock blocked communication externality power theory of executive compensation

free-riding late timing

adverse selection

moral hazard


Coase theorem

market-based incentives

disclosure principle

partial disclosure


firm type

private information search

market liquidity

theorem of the second best

decentralized regulation

a is under information approach defined as approach of financial reporting that recognizes individual responsibility for predicting future firm performance and that concentrates on providing useful information for this purpose. The approach assumes securities market efficiency, recognizing that the market will react to useful information form any source, including financial statements. b is under contracting approach

Accruals earnings management - trying to manage a corporations earnings to meet targets or goals through the increase or decrease of various accrual accounts. This is done through various accounting policies
a. Investors, knowing the accounting policies, can make changes to the financial statements to better estimate future income and correctly price the value of the company.

a. A manager tries to manage the earnings in order smooth them and make it so that the company does not violate various contract covenants the firm may have with others (e.g. the bank). Managers may also manipulate the earnings through accruals to make sure that they receive a smoother income stream, thus a more constant size of bonus. A final alternative is that they are opportunistically managing earnings in an attempt to maximize the size of their bonus each year.
i. Example - a manager chooses an accounting policy which speeds up the recognition of revenue so that net income for the period will rise and they can then achieve their bonus. Investors, knowing this, will adjust income for the period so that they can correctly price the company.

Adverse selection- information asymmetry and normally deals with insiders and insider trading
a. Investors will react to the changes in prices, but will not know if the result is noise trading or if someone has…