BUS 421 Study Guide - Final Guide: Insider Trading, Externality, Earnings Management

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 421
• Professor: Jamal Nazari

Document Summary

First-best amount of information production: marginal social benefit of information is greater than the cost of producing that information. Externalities - action taken by firm or individual that imposes cost or benefit on others for which the entity does not receive revenue. Free riding - firm or individual benefitting from an externality at no cost. Accounting information become less socially desirable as investors have no incentive to pay. Adverse selection - includes managers privy to bad news about firm"s future hence choose to not release the information and insider trading (opportunities for insiders to generate profits by trading insider information). Moral hazard - managers disguise risky investments by opportunistic earnings management hence reducing voluntary disclosure. Lack of unanimity - manager"s decision to maximize market value of firm might not align with all shareholders". Disclosure principle - when investors do not observe manager releasing forecasts, they will assume the worst case scenario.