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Overview

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Overview

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  1. Overview • Administriva • Discuss Rally in the valley • Discuss Foster readings • Principal agent analysis • P&R#1

  2. Administrivia • Syllabus? Name Cards? • Collect Information sheets (with pictures).

  3. SEC Internet Assignment (Th 2/3) • Read Ch. 2 of APR (An Introduction to Applied Professional Research for Accountants, Ziebart et. al.) • Do the assignment defined in your packet. • Steps • go to http://www.sec.gov/edgarhp.htm • click the “Search the EDGAR Database” link • identify firm using “EDGAR CIK Lookup” • Search Edgar for information on these firms. • Answer all the questions posed in the exercise.

  4. Rally in the Valley (1) • What was the proposed accounting rule change that so upset people? • Expense employee stock option compensation • Why were people upset? • Impact on corporate profits • Impact on cost of capital, ability to do IPOs • Impact on ability to hire/retain/motivate staff • Adverse shareholder/political reaction

  5. Rally in the Valley • What was the regulators’ response to the protests? • Earnings should reflect the cost to existing stockholders of giving options to employees. • Full disclosure is in investors’ best interests • Who do you think was “right”? • Who do you think will win?

  6. Today’s work • Foster discussion in groups: • Group 1 1.2 • Group 2 1.3 & 1.4 • Group 3 1.5 • Group 4 2.2 • Group 5 2.3 & 2.4 • Group 6 2.5 • Group 7 2.6

  7. Key Ideas (1) • Understand the sources of demand for and supply of financial statement information • Demand • performance evaluation • investment decisions • contracting • Supply • firms (insiders -- mainly managers) • intermediaries (outsiders -- everyone else)

  8. Key Ideas (2) • Information asymmetry is the “key” friction which gives rise to the demand for financial statement information. • What is information asymmetry? • One party has information others do not have • Why is it a “bad”? • Opens the door for self-serving, opportunistic behavior by more informed party, erodes trust.

  9. Key Ideas (3) • Effects of more information asymmetry • increases contracting costs • impact on cost of capital • impact on demand and supply of capital • impact on investor behavior & social consequences • How to solve/reduce the problem? • disclosure: voluntary vs. mandatory • information production by intermediaries

  10. Key Ideas (4) • How does accounting reduce information asymmetry? • honest, truthful disclosure is a credible means of reducing information asymmetry by sharing the information possessed by the insider. • Disclosure must be useful to uninformed • relevant, reliable, timely • relevance is determined by user needs • reliability is ensured by 3rd party e.g. auditing

  11. Key Ideas (5) • Why is accounting information useful in reducing the problems created by information asymmetry? • standard definitions of terms • revenues, expenses, assets, liabilities • standard definitions make it easier for • contracting parties to agree on what numbers to use • auditors to verify assertions by the informed party