Information Asymmetry课件.pptVIP

Information Asymmetry Some parties to business transactions may have information advantage over others Two types: Adverse selection: hidden knowledge (information) Insiders can exploit their information advantage at the expense of outsiders Moral hazard: hidden action (behavior) Mangers are tempted to shirk on effort Fundamental Problem of FAT The most useful measures to control two kinds of information asymmetry need not be the same Best trade off the investor-informing and manager performance-evaluating roles for accounting information Relevant vs. reliable accounting information Framework of the book Accounting under ideal conditions Ideal Conditions of Certainty Assumptions Known future cash receipts Given interest rate Eg, page 25 Ideal Conditions of Certainty (Cont’d) Characteristics of accounting Book value = Fair value = Present value Realized net income = Expected net income The balance sheet contains all the relevant information and the income statement contains none Entirely relevant and reliable Ideal Conditions of Uncertainty Assumptions States of nature Known set Realization is publicly observable State probabilities Objective Publicly known Given interest rate Ideal Conditions of Uncertainty (Cont’d) Eg, page 29 Two states in each year Abnormal earning Characteristics of accounting Still relevant and reliable Deduce income statement from balance sheet Income statement become informative if subjective probabilities Relevance versus Reliability Relevant information Information about future firm performance Reliable information Representationally faithful Free from bias Verifiable Under ideal conditions, complete relevance and reliability is attained Lack of Ideal Conditions State probabilities are subjective, not objective Objective probabilities Rolling a pair of fair dice Subjective probabilities What if you are not sure the dice are fair? Lack of Ideal Conditions (Cont’d) Incomplete markets Reasons thin markets information asymmetry Signifi