ACC 706 Final: ACC706 Final Exam Preparation
21 Jun 2016
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Document Summary
Chapter 8: the efficient contracting approach to decision usefulness. Focus is on role of financial accounting information in moderating information asymmetry between contracting parties: created to assist with aligning the interests of outside parties, such as shareholders and lenders, with management. We assume contracts are efficient because of the competitive nature of parties. Contract theory conflicts somewhat with conceptual framework: supports increased emphasis on reliability and conditional conservatism. If no risk, people become work adverse (typical managers) working less. If there is compensation, it motivates managers to align their objectives with shareholders objectives. Lending contracts lenders and management interests (no participation directly in profits) ; highest flexibility of capital (i. e. debt covenants) Managers assumed rational and will act in their own interest, which may conflict with shareholders" interests: as a result, shareholders demand information to encourage responsible manager effort and limit opportunistic actions.
