AFM291 Chapter 1: Chapter 1
26 Jun 2018
School
Department
Course
Professor
Chapter 1
Generally Accepted Accounting Principles: Broad principles and conventions of general
application as well as rules and procedure that determine accepted accounting practices.
Information: Evidence that can potentially affect an individual’s decisions.
Information Asymmetry: A condition in which some people have more information than
others.
Costly Signalling: Communication of information that is otherwise unverifiable, by means of an
action that is potentially costly to the sender; contrast with cheap talk.
Cheap Talk: Communication of unverifiable information, by means that are virtually costless.
Adverse Selection: A type of information asymmetry whereby one party to a contract has an
information advantage over another party.
Moral Hazard: A type of information asymmetry whereby one party to a contract cannot
observe some actions relating to the fulfillment of the contractual terms by the other party.
Hidden actions.
Agency Problem: Arises from the inability of the principals to monitor the agents to ensure that
the agents make decisions in the best interest of the principals.
Positive Accounting Theory: A theory for understanding managers’ motivations, accounting
choices, and reactions to accounting standards.
Public Companies: Firms with equity, debt, or other securities traded in public markets.
Efficient Securities Market: A market in which the prices of securities traded in that market at
all times properly reflect all information that is publicly known about those securities. A market
that is strong, form efficient has prices that reflect all information, whether publicly or privately
known.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Generally accepted accounting principles: broad principles and conventions of general application as well as rules and procedure that determine accepted accounting practices. Information: evidence that can potentially affect an individual"s decisions. Information asymmetry: a condition in which some people have more information than others. Costly signalling: communication of information that is otherwise unverifiable, by means of an action that is potentially costly to the sender; contrast with cheap talk. Cheap talk: communication of unverifiable information, by means that are virtually costless. Adverse selection: a type of information asymmetry whereby one party to a contract has an information advantage over another party. Moral hazard: a type of information asymmetry whereby one party to a contract cannot observe some actions relating to the fulfillment of the contractual terms by the other party. Agency problem: arises from the inability of the principals to monitor the agents to ensure that the agents make decisions in the best interest of the principals.
