Conceptual%20Framework%20of%20Assurance%20I%20%28August%2029%2c%202011%29

Conceptual%20Framework%20of%20Assurance%20I%20%28August%2029%2c%202011%29

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Conceptual Framework of Assurance I Tim Bauer ACCY 405 August 29, 2011
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Announcements class on Wednesday, August 31st REMINDER: NO IN-CLASS SESSION THAT DAY Group talk schedule will be posted on the course website on  Wednesday, August 31st Update to Syllabus (see announcement on website) Changes begin for September 7th Top earners in the Market Game
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Recap from Last Class Market Game
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Today’s Objectives A follow up discussion related to the lemons market A discussion of assurance types An assurance overview Why should we be concerned about earnings management? Collingwood (2001) Dechow & Skinner (2000)
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So you want a used car? You want a Red Barchetta
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The Market for Used Barchettas Assume it’s known that 60% of this car type are worth $15,000 …but the other 40% are unreliable and so are worth a lot less,  $5,000.
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How much would the owner of a  Red Barchetta (Neal Peart?) ask for it? Important Issues: (1) Does the owner know whether the car is good or is a  lemon? (2) Will the owner of a lemon be constrained by that  knowledge?
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How much should you pay for a Red Barchetta? If you are risk neutral, pay the expected value: EV = .6 ($15,000) + .4 ($5,000) = $11,000 You would be indifferent between paying $11,000 and  having the car versus paying $0 and forgoing the car.
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Sellers who are certain that they have a “good” car, are not willing  to sell for less than $15,000. Sellers who think they have a “good” car will sell at some discount  from $15,000 (e.g., $12,500). Risk neutral buyers are willing to spend no more than $11,000. Therefore, only lemons will be offered for sale. …but buyers will figure this out and will not buy any cars at all!
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Conceptual%20Framework%20of%20Assurance%20I%20%28August%2029%2c%202011%29

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