Efficient Contracting Theory
Studies the role of financial accounting information in moderating info asymmetry between contracting parties, thereby contributing to efficient contracting, stewardship, and efficient corporate governance
Efficient Contract Theory
When the market value of a share greatly exceeds the exercise price
Deep-in-the-money
Recognizes that financial reporting can shape the behaviour and decisions of individuals and organizations, influencing investment, credit, and other economic outcomes
Economic consequences
The theory that the higher the debt/equity ratio, the more likely that managers will use accounting methods that increases income
Debt/Equity Hypothesis
An American energy, commodities, and services company based in Houston, Texas, known for its financial downfall
Enron
Two assumptions of Efficient Contract Theory
Managers are rational and self-interested
This is a type of debt covenant where net income is increased by a certain percentage
Income escalator clauses
The 2 main accounting boards mentioned in the article
Accounting Principles Board (APB) and Financial Accounting Standards Board (FASB)
The hypothesis that the larger firms are more likely to use accounting methods that reduce reported profits
Political Cost Hypothesis
The manipulation tactic used by social media stock market influencers between Jan 2020 - Apr 2022
Pump-and-dump
Aligns manager interests with stakeholders, who trust managers to not engage in opportunistic behaviour
Stewardship role of financial reporting
Managers pressure compensation committees to grant unscheduled ESOs right before good earnings news
Spring loading
The name of the bank that collapsed first in the 2023 banking crisis
Silicon Valley Bank
The theory that identifies empirical regularities and explanations for them
Positive Accounting Theory
This organization recognized the importance of considering the broader economic implications when developing accounting standards
Financial Accounting Standards Board (FASB)
Created by excessive conservatism
Costs of false covenant alarms, higher debt interest rates, and reduction in predictability of cash flows
A set of bookkeeping guidelines that call for a high degree of verification before a company can make a legal claim to any profit
Conservative accounting
Origins and date of economic consequences
1960's - Accounting Principles Board (APB)
A method of improving positive accounting research
Any of:
Develop new hypotheses and tighter links between the theory and empirical tests
Develop theoretical and empirical models that sort out the endogeneity problem among the variables
Reduce measurement errors in net accruals to increase the test’s power
A fair value accounting method used by Enron that is easily subject to manipulation
Mark-to-market accounting