Question

According to the article, The Economics of Financial Reporting Regulation, which one of the following is...

According to the article, The Economics of Financial Reporting Regulation, which one of the following is NOT an argument for market regulation:

A. the firm as a monopoly supplier of information

b. failure of financial reporting and auditing

c. signaling incentives

d. social goals

Business   Accounting   
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Homework Answers

Answer #1

The correct answer is Signalling Theory.

Since Signalling theory explains why firms have an incentive to report voluntarily to the capital markets: voluntary disclosure is necessaryin order to firms to compete successfully in the market for risk capital. Insiders know more about a company and its future prospects than investors do, therefore investors will protect themselves by offering a lower price for the company. However, the value of the company can be increased if the firm voluntarily reports (signals) private information about itself that is credible and reduces outsider uncertainity.

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