Ch08
Scott, Financial Accounting Theory, 7th Edition
Instructor’s Solutions Manual
Chapter 8
CHAPTER 8
THE EFFICIENT CONTRACTING APPROACH TO DECISION USEFULNESS
8.1
Overview
8.2
What is Efficient Contract Theory?
8.3
Sources of Efficient Contracting Demand for Financial Accounting Information
8.4
8.3.1
Lenders
8.3.2
Shareholders
Accounting Policies for Efficient Contracting
8.4.1
Reliability
8.4.2
Conservatism
8.5
Contract Rigidity
8.6
Employee Stock Options
8.7
Discussion and Summary of ESO Expensing
8.8
Distinguishing Efficiency and Opportunism in Accounting
8.9
Summary of Efficient Contracting for Debt and Stewardship
8.10
Implicit Contracts
8.10.1 Definition and Empirical Evidence
8.10.2 A Single-Period Non-Cooperative Game
8.10.3 A Trust-Based Non-Cooperative Game*
8.10.4 Summary of Implicit Contracting
8.11
Summary of Efficient Contracting
285
Copyright © .
Scott, Financial Accounting Theory, 7th Edition
Instructor’s Solutions Manual
286
Copyright © .
Chapter 8
Scott, Financial Accounting Theory, 7th Edition
Instructor’s Solutions Manual
Chapter 8
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
1.
To Understand what Contract Theory is, and What it Wants to Accomplish
This chapter begins the second major component of the text, namely to consider management’s role in financial reporting, and how managers can be motivated to manage in the interests of firm investors.
Suggested points to consider;
•
Managers, like investors, are assumed to be rational, that is, to act in their own best interests.
•
The moral hazard problem. In our context, this arises because manager effort in running the firm cannot be observed by outside investors. As a result, the interests of rational managers conflict with the interests of investors, since the manager may shirk on effort at investors’ expense. The question then is, how is this conflict resolved so that investors have reasonable trust that the manager is working on their behalf.
Instructor’s Solutions Manual
Chapter 8
CHAPTER 8
THE EFFICIENT CONTRACTING APPROACH TO DECISION USEFULNESS
8.1
Overview
8.2
What is Efficient Contract Theory?
8.3
Sources of Efficient Contracting Demand for Financial Accounting Information
8.4
8.3.1
Lenders
8.3.2
Shareholders
Accounting Policies for Efficient Contracting
8.4.1
Reliability
8.4.2
Conservatism
8.5
Contract Rigidity
8.6
Employee Stock Options
8.7
Discussion and Summary of ESO Expensing
8.8
Distinguishing Efficiency and Opportunism in Accounting
8.9
Summary of Efficient Contracting for Debt and Stewardship
8.10
Implicit Contracts
8.10.1 Definition and Empirical Evidence
8.10.2 A Single-Period Non-Cooperative Game
8.10.3 A Trust-Based Non-Cooperative Game*
8.10.4 Summary of Implicit Contracting
8.11
Summary of Efficient Contracting
285
Copyright © .
Scott, Financial Accounting Theory, 7th Edition
Instructor’s Solutions Manual
286
Copyright © .
Chapter 8
Scott, Financial Accounting Theory, 7th Edition
Instructor’s Solutions Manual
Chapter 8
LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
1.
To Understand what Contract Theory is, and What it Wants to Accomplish
This chapter begins the second major component of the text, namely to consider management’s role in financial reporting, and how managers can be motivated to manage in the interests of firm investors.
Suggested points to consider;
•
Managers, like investors, are assumed to be rational, that is, to act in their own best interests.
•
The moral hazard problem. In our context, this arises because manager effort in running the firm cannot be observed by outside investors. As a result, the interests of rational managers conflict with the interests of investors, since the manager may shirk on effort at investors’ expense. The question then is, how is this conflict resolved so that investors have reasonable trust that the manager is working on their behalf.