Regulation and Accounting Information in Free Markets
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Questions and Answers

According to the passage, what is the main argument for why managers should be able to determine the accounting methods that best reflect their entity's performance?

  • In the absence of regulation, managers will still be motivated to provide financial information to avoid being perceived as a 'lemon'.
  • Managers have the best understanding of their business and can make more informed decisions than regulators. (correct)
  • Accounting information has characteristics of a 'free good' and market mechanisms do not operate efficiently with free goods.
  • Managers are able to determine the marginal costs and benefits of disclosing particular information.

    • What is the 'lemons' argument mentioned in the passage?

  • Accounting information has characteristics of a 'free good' and market mechanisms do not operate efficiently with free goods.
  • In the absence of regulation, only those with sufficient power will be able to obtain the information they demand.
  • Managers will only disclose information that makes their company appear high quality, hiding any negative information.
  • If an organization fails to provide financial information, it will be assumed to be of inferior quality, like a 'lemon'. (correct)

    • According to the passage, what is one argument against the idea that market mechanisms will lead to the optimal amount of accounting information being produced?

  • Managers lack the sophistication to determine the marginal costs and benefits of disclosing particular information.
  • Accounting information has characteristics of a 'free good' and market mechanisms do not operate efficiently with free goods.
  • Markets display characteristics that indicate they are not always efficient, and 'on average' arguments ignore individual losses.
  • All of the above (correct)

    • What is the 'rights-to-know' argument mentioned in the passage?

    <p>Individuals affected by a company's actions have a right to access information about the company, which may be ignored in the absence of regulation.</p> Signup and view all the answers

    What does the passage mean when it states that the 'market for lemons' argument assumes that 'if you do not disclose particular information then the market will penalise you'?

    <p>If a company does not disclose negative information, the market will assume the company is of inferior quality, like a 'lemon'.</p> Signup and view all the answers

    What is the main argument presented in the passage for why market mechanisms may not lead to the optimal amount of accounting information being produced?

    <p>All of the above</p> Signup and view all the answers

    According to the argument for reducing regulation, what is assumed about individuals?

    <p>They will act in their own self-interest to maximize their wealth.</p> Signup and view all the answers

    What is one argument made in favor of a 'free-market' approach to accounting information?

    <p>Markets like the capital market and corporate takeovers will penalize managers who provide biased information.</p> Signup and view all the answers

    According to the contracting perspective, why might managers provide financial information to investors or creditors?

    <p>To attract funds at a lower cost by allowing outside parties to monitor their actions.</p> Signup and view all the answers

    What is one assumption made in the argument for reducing regulation of accounting information?

    <p>People expect others to act in their own self-interest to maximize their wealth.</p> Signup and view all the answers

    What might happen if managers fail to provide financial information?

    <p>Both (b) and (c).</p> Signup and view all the answers

    What is one argument made in the text for reducing regulation of accounting information?

    <p>Accounting information should be treated like any other good, subject to supply and demand.</p> Signup and view all the answers

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