Cha9

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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
 parties
 would
 be
 better
 if
 BH
 (Investor
 buy,
 manager
 honest)
 were
 chosen
 =
 Cooperative
 solution
  Will
 end
 up
 at
 nash
 equilibrium=
 Investors
 refuse
 to
 buy,
 manager
 distort
 (RD)
 
  9.4
 Some
 Models
 of
 Cooperative
 Game
 Theory
  9.4.1
 Introduction
  Essence
 of
 cooperation
 in
 game
 theory
 is
 that
 the
 players
 involved
 in
 a
 conflict
 situation
 can
 enter
 into
  agreements
 that
 they
 believe
 as
 binding.
 =
 called
 contracts
 
 

2
 types
 of
 contracts
 with
 implications
 for
 financial
 accounting
 theory:
  1. Employment
 contracts:
 between
 firm
 (principal)
 and
 top
 manager
 (agent)
 –
 focus
 of
 discussion
  2. Lending
 contracts:
 between
 firm
 manager
 and
 bondholder
 
  Agency
 theory
 :A
 branch
 of
 game
 theory
 that
 studies
 the
 design
 of
 contracts
 to
 motivate
 a
 rational
 agent
  to
 act
 on
 behalf
 of
 a
 principal
 when
 the
 agent’s
 interests
 would
 otherwise
 conflict
 with
 those
 of
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