BUS 421 Study Guide - Final Guide: Management, Financial Statement, Escalator

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Efficient contracting theory: studies the role of financial accounting information in moderating information asymmetry between contracting parties, thereby contributing to efficient contracting and stewardship and efficient corporate governance. Confirmatory role: net income can confirm, or disconfirm, announcements made by management during the year, such as earnings forecasts. For example, if a firm builds and maintains a reputation for high quality financial reporting, it generates the trust of customers, creditors, and investors that it will continue to operate with integrity. Efficient contracting: management entering into contracts that optimally balance both contract benefits and costs. Manager opportunism: accounting policies that are chosen most to align with the interests of management, rather than that of other stakeholders. Economic consequences: impact of accounting reports on the decision-making behaviour of business, government, unions, investors, and creditors. Implicit contract / constructive obligation: when a firm"s past behaviour creates a valid expectation of outside parties that the firm will continue to behave with integrity.

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