Q1 – What is the difference between positive and normative theory of financial accounting
and is one better than the other?
Q2 – Early positive research investigated evidence of share price changes as a result of
disclosure of accounting information. However, such research did not explain why particular
accounting methods were selected in the first place. How did PAT fill this void?
Ans: Agency theory states that a relationship between agent and principle will be different
this is because of self-interest.
Q3 – What does it mean to say that an organization can be represented as a nexus of
contracts?
Ans: Nexus of contracts means multiple of contracts. In Agency theory these contracts are in
place to ensure all parties are satisfied (self-interest), at the same time maximizing firm’s
value.
Q13 – Organizations typically have a number of contractual arrangements with debtholders,
with many covenants written to incorporate accounting numbers.
(a) Why would an organization agree to enter into such an agreement with
debtholders?
Ans: Minimize risk, it’s a form of price protection and guarantee as well.
(b) On average, do debt holders gain from such agreements?
Ans: it depends type of agreements. Covenants/borrowings
Q14 – PAT typically argue that managers can reduce political costs by simply adopting an
accounting method that leads to a reduction in reported income. Does this imply anything
about the perceived efficiency of those involved in the political process, and if so, what
perceptions is held?
Ans:
10.1 What is the role of capital markets research?
10.2 What assumptions about market efficiency are typically adopted in capital market
research? What do we mean by ‘market efficiency’?
Ans: The assumptions stated market will react to pricing. Ideally we want market to be in
semi strong form. What is meant by market efficiency means price can be influence by many
forms. (historical cost, size,
10.8 How would a researcher undertaking capital markets research typically justify that a
particular item of information has ‘value’ to investors?
Ans: It has got value, but the reaction is slower.
10.10 Evaluate the following statement: if an item of accounting information is released by a
corporation and there is no apparent change in the share price of the company, the
information is not relevant to the market and therefore there is no point in disclosing such
information again.
Ans: