Kaplan, Steven E. and Ruland, Robert G., “Positive Theory, Rationality and Accounting Regulation” Critical Perspectives on Accounting, (1991). Existing agency theory fails as a positive theory since it does not provide theory of accounting regulatory development. Watts & Zimmerman are inconsistent w/ positive theory, since they evaluate rather than predict theories. If W&Z wish to argue normatively, they should not do so under the guise of positive theory. Failure of agency theory to provide a prediction of accounting regulatory development stems from its reliance on a rationality assumption which is both too narrow and too broad.
CHAPTER 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT 2. The statement is incorrect. If a firm has debt, it might be advantageous to stockholders for the firm to undertake risky projects, even those with negative net present values. This incentive results from the fact that most of the risk of failure is borne by bondholders. Therefore, value is transferred from the bondholders to the shareholders by undertaking risky projects, even if the projects have negative NPVs.
DFA roughly believed in efficient market theory. They believed that the high return of small stocks and value stocks come from high risk which matched the efficient market theory. Moreover, they would not do any fundamental analysis of the firm in question. (p6) At the same time, however, they did some adjustments based on other two principles, sound academic researches and skilled traders, to get rid of those not matching the theory. For example, they did not purchase those stocks with inside trade information.
• Different investors have different views about which screening metrics an investor should use to reduce the number of mutual funds down to a more manageable set for evaluation in detail. Even the criticism about the rating, it offered value to investors for reference. For example, an evaluation system, which takes in to account the future perspective, can’t promise the return and its forecast precision, just like the analyst report. Hence, there are still some investors see Morningstar ratings as one of the resource to find winning mutual funds (2) Based on the case, we noticed that Morningstar ratings are indicators of past performance, and should not be used
Customer Profitability and Customer Relationship Management at RBC Financial Group Case Assignment The first page of the case discusses Richard McLaughlin’s challenge to interpret the RBC customer profitability data and define an actionable strategy for managing the various market segments. Following are representative data for RBC Financial Group’s three major customer segments; Key, Growth, and Prime, described in the case. The first plot is customer lifetime value (CLTV) calculated over 5 years for different percentiles of customers. The second plot is customer value calculated just for the next one year for different percentiles of customers: This is the current customer profitability. The above calculations have been performed using the CLTV method described in the case.
Problems found in the Accounting and business practices There were innumerable issues with Enron’s books and reporting practices before the company finally collapsed. The most glaring of these problems were the many companies set up by Fastow designed to finance business ventures and bury debt, keeping them out of the Enron reporting. These dealings involved setting up special purpose entities to hedge risk on investments, allowing investments to be reported at higher values. What was not disclosed was that these special purposes entities were using Enron stocks and financial guarantees as collateral, providing no real protection against down-side risk (Bufkin & Dharan, 2004). These dummy companies were financed by several banking institutions in order to make these deals, allowing Enron to hide billions in debt.
e. Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions. 3. Which of the following statements is CORRECT? a. In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
The first is adverse selection. Adverse selection occurs because some persons, such as managers and other insiders know more about the current condition and future prospects of the firm than outside investors. Financial reporting is one of the mechanisms that are used to control the problem of adverse selection by credibly converting inside information into outside information. The second one is moral hazard. This problem occurs because of the separation of ownership and control that characterizes most medium and large
Supply does not match demand because the goal of the production entity is revenue and the goal of the consumer is spending. This means that the market cannot operate on a smooth and perfect level, due to the difference in goals. The classical model states that government involvement is harmful to the economy. Whether it is harmful or not should not be a question here because it
2. Identify the audit objectives that Hanauer’s auditors hoped to accomplish as a result of their account confirmation procedures. In your response, consider each of the four types of account balances. 3. What additional alternative audit procedures do you believe the Hanauer auditors should have applied to those accounts that the client did not want confirmed?