Professional Documents
Culture Documents
W
We live
li in
i a world
ld where
h
conditions
diti
are non-ideal
id l
(what does that mean?) and, therefore, there is not a
No scientifically true
net income number
true net income number,, which provides
p
a role for
accounting reports
Key elements:
Non-ideal conditions:
As we will see
see, information is useful because it
can help decision makers to update their
probability
p
y assessments.
E() = 21.9
E() = 30% x 1,600 + 70% x 0 = 12
E
Example
l 3-1
3 1 iin th
the ttextbook
tb k
2 states
Possibly not the way all investors make decision, but the
results are consistent with observed outcomes.
Done
Payoff Table:
Act
State
High
Low
1: Buy shares
$1,600
$0
2: Buy bonds
$225
$225
0.80
0.20
0.10
0.90
0.30 x 0.80
0.30 x 0.80 + 0.70 x 0.10
0.77
Information System
Key points
-
IIn the
th examples,
l
the
th information
i f
ti improves
i
the
th investors
i
t
ability to assess the probability of one or another outcome.
Main diagonal \ = Probability that the right prediction is given when the right event occurs, and vice versa.
Decision Usefulness
- Link Accounting Policy to Conceptual Framework
Decision Usefulness
- Link Accounting Policy to Conceptual Framework
Primary characteristics
A.k.a reliability
E h
Enhancing
i characteristics
h
t i ti
Confirm expectations
Summary
solve
l iinvestment
t
td
decisions
i i
based
b
d on prior
i or
posterior possibilities
Group Questions
Information Asymmetry
2
2.
Mandatory Disclosure
3.
Voluntary Disclosure
4.
Earnings Management
5.
Executive Compensation
6.
7.
Market Efficiency