Exam 4: The Economics of Financial Reporting Regulation

An argument in favor of unregulated markets is that because of private opportunities to contract for information, market intervention in the form of mandatory disclosure rules is both unnecessary and undesirable.

Which of the following is not an argument supporting unregulated markets?

Which of the following concepts explains why firms have an incentive to report voluntarily to the market even if there were no mandatory reporting requirements?

Which of the following is not a possible justification for regulated markets?

Accounting information is a public good.

Which of the following is not a negative consequence of regulating accounting?

Early adoption of new financial accounting standards generally indicates "bad news" whereas late adoption generally indicates "good news."

Mandatory public reporting of financial information:

Discuss Ronen's solution to the problem of companies "capturing" auditors as a result of management consulting contracts between auditor and auditee.

Which of the following groups is not listed in your text as being affected by accounting regulation? a. The FASB b. Companies c. Auditors d. Free riders

Which of the following does not apply to a codificational system such as accounting standards?

What are the arguments against regulation of financial reporting?

Arguments supporting unregulated markets are largely inductive in nature.

True market demand for public goods may be determined by the number of consumers who pay for the goods.

There is a tendency for overproduction in unregulated markets.

Congress empowered the Securities and Exchange Commission (SEC) to regulate financial reporting in the 1930s.

Which of the following concepts holds that voluntary disclosure is necessary in order for a firm to compete successfully in the market for risk capital?

The present financial disclosure system imposes costs on users rather than the companies themselves.

An argument supporting accounting regulation is that the production costs of mandatory reporting requirements may be small since most of the basic information is produced as a by-product of internal accounting systems.

The major agency relationship is between the management of a firm and the firm's creditors.