1. Overview Administriva Rally in the valley Discuss Foster readings
Principal agent analysis
P&R#1

2. Administrivia Syllabus? Name Cards?
Collect Information sheets (with pictures).

3. SEC Internet Assignment (Th 2/3)
Read Ch. 2 of APR (An Introduction to Applied Professional Research for Accountants, Ziebart et. al.)
Do the assignment defined in your packet.
Steps
go to
click the “Search the EDGAR Database” link
identify firm using “EDGAR CIK Lookup”
Search Edgar for information on these firms.
Answer all the questions posed in the exercise.

4. Rally in the Valley (1)
What was the proposed accounting rule change that so upset people?
Expense employee stock option compensation
Why were people upset?
Impact on corporate profits
Impact on cost of capital, ability to do IPOs
Impact on ability to hire/retain/motivate staff
Adverse shareholder/political reaction

5. Rally in the Valley What was the regulators’ response to the protests?
Earnings should reflect the cost to existing stockholders of giving options to employees.
Full disclosure is in investors’ best interests
Who do you think was “right”?
Who do you think will win?

6. Today’s work Foster discussion in groups: Group 1 1.2

7. Key Ideas (1)
Understand the sources of demand for and supply of financial statement information
Demand
performance evaluation
investment decisions
contracting
Supply
firms (insiders -- mainly managers)
intermediaries (outsiders -- everyone else)

8. Key Ideas (2)
Information asymmetry is the “key” friction which gives rise to the demand for financial statement information.
What is information asymmetry?
One party has information others do not have
Why is it a “bad”?
Opens the door for self-serving, opportunistic behavior by more informed party, erodes trust.

9. Key Ideas (3) Effects of more information asymmetry
increases contracting costs
impact on cost of capital
impact on demand and supply of capital
impact on investor behavior & social consequences
How to solve/reduce the problem?
disclosure: voluntary vs. mandatory
information production by intermediaries

10. Key Ideas (4) How does accounting reduce information asymmetry?
honest, truthful disclosure is a credible means of reducing information asymmetry by sharing the information possessed by the insider.
Disclosure must be useful to uninformed
relevant, reliable, timely
relevance is determined by user needs
reliability is ensured by 3rd party e.g. auditing

11. Key Ideas (5)
Why is accounting information useful in reducing the problems created by information asymmetry?
standard definitions of terms
revenues, expenses, assets, liabilities
standard definitions make it easier for
contracting parties to agree on what numbers to use
auditors to verify assertions by the informed party