Term
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Definition
| Current investors, potential/future investors, management, creditors, govt. |
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Term
| What depends on the user? |
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Definition
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Term
| Role of financial accounting: |
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Definition
| supply user with information—accountant’s job is to know what the investor needs |
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Term
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Definition
| Investor supplies the information to the accountant (contrasts the role of financial accounting) |
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Term
| Rationale Decision Theory |
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Definition
Captures the “average” investor’s behavior—not focused on outliers
Logically what should happen- “reasonable” |
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Term
| How does understanding rational behavior help an accountant? |
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Definition
| Helps an accountant to provide the information that investor’s need |
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Term
| What is the objective of the Single Person Decision Theory? |
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Definition
| Objective is to maximize the expected utility |
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Term
| What are the two types of investors? |
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Definition
1. Risk Averse Investors
2. Rational Investors |
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Term
| Under the Single Person Decision Theory, are probabilities objective or subjective? |
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Definition
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Term
| What is Risk Aversion under the Single Person Decision Theory? |
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Definition
| Risk increases as the stakes increase |
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Term
| How is risk measured under the Single Person Decision Theory? |
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Definition
- Diminishing Returns (utility): As we increase utility, eventually payoff diminishes (plateaus)
- Square roots, logs, natural logs |
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Term
| If there is no risk under the Single Person Decision Theory what happens? |
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Definition
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Term
| Conditional Probability Table: |
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Definition
Establishes the probabilities of several outcomes
If a probability is below 50%, no bueno. We must use Bayes Theorem to help use combine probabilities to give us the outcome we would like. |
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Term
| How do we use Bayes Theorem to get the probabilities we "want"? |
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Definition
| Combine prior probabilities with information systems to get posterior probabilities |
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Term
| How do we test quality of financial statements? |
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Definition
o Ratios
o Variances
o Actual vs. budgeted
o Revisions & Restatements
o Stock Price
o Accruals – especially those based on estimations |
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Term
| Issues with Decision Theory |
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Definition
-Prior probabilities—are they accurate?
-Specifying payoffs
-Specifying utilities
-Information systems
-Conclusions
-States of nature |
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Term
| Easton & Zmijewski investigated what? |
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Definition
| Investigated the response of stock prices to accounting earnings announcement |
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Term
| If accounting information is "useful" what would happen? |
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Definition
| The stock price would react accordingly |
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Term
| How do we measure accounting information? |
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Definition
Focus on earnings announcement & the returns after the announcement- releasing information to the market
- is the info good/bad?
-Compare the earnings announcement to analysts forecasts |
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Term
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Definition
| = Abnormal stock price return |
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Term
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Definition
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Term
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Definition
discounted PV of expected dividends
• Numerator: expected dividends
• Denominator: Discount rate
• Beta= Systematic risk
• Greater firm risk→ greater beta → greater discount rate
• Results in lower price & lower returns |
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Term
| Easton & Zmijewski determined ERC's vary..why is this? |
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Definition
Greater ERC, greater revision
Greater ERC, greater beta |
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Term
| Easton & Zmijewski determined that... |
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Definition
| Information systems are informative |
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Term
| The conceptual framework is based in part on what theory? |
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Definition
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Term
| Useful information is ___ and ___ |
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Definition
| relevant and faithful in representation |
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Term
| How does the financial statement improve decision making? |
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Definition
| by refining posterior state probabilities |
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Term
| Does utility increase proportionally with payoffs? |
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Definition
| No, eventually they plateau/diminish |
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Term
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Definition
| A guaranteed return that someone would accept, rather than taking a chance on a higher, but uncertain, return |
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