Cha9
Presentation Summary Chapter 9 -‐ An analysis of conflict 9.1 & 9.2 Understanding game theory Game theory: Attempts to model and predict the outcome between rational individuals. -‐Helps us understand how managers, investors and other affected parties can rationally deal with the economic consequences of financial reporting. • • • Presence of uncertainty and information asymmetry Each player is assumed to maximize his expected utility Each player takes the actions of the other players into account
Types of games: -‐Cooperative game: The parties can enter in a binding agreement ( Ex: Cartel ) -‐Non-‐cooperative game: When a biding agreement is not possible ( Ex: Oligopolistic industry ) 9.3 A non-‐cooperative game model Investor interests: • Relevant and reliable financial statements in order to assess risk for decision-‐making
Manager interests: • • • Omit liabilities from balance sheet May prefer not to reveal accounting policies being used (Discretionary accruals) Present the firm in the best light (bias)
= Conflicting interests Example 9.1: Both
Types of games: -‐Cooperative game: The parties can enter in a binding agreement ( Ex: Cartel ) -‐Non-‐cooperative game: When a biding agreement is not possible ( Ex: Oligopolistic industry ) 9.3 A non-‐cooperative game model Investor interests: • Relevant and reliable financial statements in order to assess risk for decision-‐making
Manager interests: • • • Omit liabilities from balance sheet May prefer not to reveal accounting policies being used (Discretionary accruals) Present the firm in the best light (bias)
= Conflicting interests Example 9.1: Both