FAT Week 11 - FAT Lecture Week 11 Standard Setting 1...

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FAT Lecture Week 11 – Standard Setting 1. Theory (i) Need for reg. (ii) Incentives for info production (iii) Optimal level of reg. 2. Politics (i) Theories of reg. (ii) Conflicts (iii) Criteria for standard setting (iv) International Acc Standards 1. Need for reg. Many industries are regulated e.g. utilities, financial services Why? - To ^ info production (First-best X achieved: Marginal benefit of info production= Marginal cost) - Info viewed as public good o Proprietary – potential impact on CF o Non-proprietary – X direct impact on CF Why is first-best X achieved? 1. Externalities & free riding Info as public good (Investors X pay for info – everyone for benefit – X incentive to co. as they X gain in monetary term – hence co. X motivated to provide socially-optimal info) Positive externalities: education Negative externalities: smoking When you do sth that affect people X related to contract e.g. Share BCOM knowledge to someone else Free riding: Taking advantage of someone else’ work 2. Adverse selection Insider trading – hide info, stock price X reflect situation Manager may delay in info release – until more opportunistic moment 3. Moral hazard Opportunistic EM to disguise shirking (Hide true level of perf if X as good as market expectations, hence X disclose info that reflect true perf) 4. Lack unanimity Managers & investors may want diff amount of info
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(Unless there’s consensus, no optimal level of production of info) 2. Incentives for info production Contracting Market-based incentives - Disclosure principle - Signalling Contracting Coase Theorem = Specify conditions under which externalities can be internalised betw contracting parties, reducing need for reg. Example: cost to release info = 100; investors value info = 150 Case 1: Inv has right to demand info o Release info = 100, withhold info = 150 Case 2: Firm has property rights to info o Release info = 100, investor willing to pay = 150 Irrespective who has the right, it is always beneficial for info to release Market-based incentives Disclosure Principle Investors assume that non-disclosure means bad news (Even if X bad news, but market assumes, hence stock prices decrease) Hence, co. has to disclose info, otherwise, market views as bad news e.g. 2002-2002 Accounting scandals – Low investor confidence, eco recession GE stock price fell – because of general market movement (no evidence of engaging in irregular acc practices, but market suspects) How to prevent stock price decline?
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  • Fall '15
  • International Financial Reporting Standards, Externality, acc standards

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