Accounting Theory

Accounting Theory

Moral hazard is a type of information asymmetry whereby one or more parties to a business transaction, or potential transaction, can observe their actions in fulfillment of the transaction but other parties cannot. An information system is a table giving, conditional on each state of nature, the objective probability of each possible financial statement evidence item. Information is evidence that has the potential to affect an individual’s decision. An efficient securities market is one where the prices of securities trades on that market at all time fully reflect all information that is publicly now about those securities.

The fundamental value of a share is the value it would have in an efficient market if there is no inside information. That is, all information about the share is publicly available. The information approach to decision usefulness is an approach to financial reporting that recognizes individual responsibility for predicting future firm performance and that concentrates on providing useful information for this purpose. The approach assumes securities market efficiency, recognizing that the market will react to useful information from any source, including financial statements.

An earning response coefficient measures the extent of security abnormal market return in response to the unexpected component of reported earnings of the firm issuing that security. The measurement approach to decision usefulness is an approach to financial reporting under which accountants undertake a responsibility to incorporate current values into the financial statements proper, providing that this can be done with reasonable reliability, thereby recognizing an increased obligation to assist investors to redirect firm performance and value.

Economic consequences is a concept that asserts that, despite the implications of efficient securities market theory, accounting policy choice can affect firm value. Positive accounting theory (PAT) is concerned with predicting such actions as the choices of accounting policies by firm managers and how managers will respond to proposed new accounting standards. Agency theory is a branch of game theory that studied the design of contracts to motivate a rational agent to act on behalf of a ironical when the agent’s interests would otherwise conflict with those of the principal.

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