01-03finance.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 o