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Ex Post Opportunism Versus Ex Ante Efficient Contracting - Ex Post

Contracting theory and agency theory provide frameworks for understanding the relationships between shareholders, managers, and debtholders in a company. Accounting policies can be used to align their interests by addressing problems that arise from the separation of ownership and management. Signalling theory also examines how managers voluntarily provide information to investors through accounting disclosures to assist their decision making and communicate expectations about the future. Political and regulatory pressures additionally influence accounting policies and standards adopted by firms.

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Sausan Sania
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122 views1 page

Ex Post Opportunism Versus Ex Ante Efficient Contracting - Ex Post

Contracting theory and agency theory provide frameworks for understanding the relationships between shareholders, managers, and debtholders in a company. Accounting policies can be used to align their interests by addressing problems that arise from the separation of ownership and management. Signalling theory also examines how managers voluntarily provide information to investors through accounting disclosures to assist their decision making and communicate expectations about the future. Political and regulatory pressures additionally influence accounting policies and standards adopted by firms.

Uploaded by

Sausan Sania
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Summary of Chapter 11 – Positive Theory of Accounting Policy and Disclosure

Sausan Sania (008201800087)

Contracting theory - The firm is seen as a ‘nexus’ of contractual relationships. The firm is
seen as an efficient way of organising economic activity to reduce contracting costs: equity
(management) contracts (an agency contract), and debt contracts (an agency contract).
Agency theory - An agency contract is one where one party (the principal) engages another
(the agent) to act on their behalf, e.g. where there is a separation of management and
ownership. Both parties are utility maximisers: agent may therefore act from self-interest
(divergence of interests is the agency problem), and contracts incorporating accounting
numbers can be used to align the interests of both parties.
Price protection and shareholder/manager agency problems - The separation of
ownership and management leads to divergent behaviour by agents. Divergence comes about
because of the risk-aversion problem, the dividend-retention problem, and the horizon
problem.
Shareholder-debtholder agency problems - In this context, the manager is assumed to be
either the sole owner of the firm, or has interests that are totally aligned with the interests of
the shareholders: the principal is the debtholder, and the agent is the manager acting on behalf
of shareholders.
Ex post opportunism versus ex ante efficient contracting - Ex post opportunism occurs
when, once a contact is in place, agents take actions that transfer wealth from principals to
themselves. Ex ante efficient contracting occurs when agents take actions that maximise the
amount of wealth available to distribute between principals and agents. ex ante – before
contracts are finalised.

Signalling theory - Managers voluntarily provide information to investors - signals - to assist


in their decision making. Similar to efficient contracting. Aligned with the information
hypothesis. Managers signal expectations and intentions regarding the future.

Political processes - Often firms try to avoid public attention that is costly to them
(financially, and in terms of public perception and reputation). They reduce their reported
profit or its volatility, e.g. banking sector in Australia.

Conservatism, accounting standards and agency costs - Conservatism shows a bias by


accountants accelerating recognition of expenses and decelerating recognition of revenue.

Issues for auditors - The demand for auditing can be explained by agency theory as part of
the monitoring and bonding activity and costs.

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