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LEARNING OBJECTIVES:
After following this course, students should be able to
· Analyze optimal risk sharing in partnerships
· Analyze, compare, and apply equilibrium value relations
· Analyze, compare, and apply no-arbitrage accounting value relations
· Analyze, compare and discuss stationary accounting value models
· Analyze and discuss models of rational expectations
· Describe, analyze, apply and discuss signaling models and the role of accounting therein
COURSE DESCRIPTION:
Financial reporting is a process in which the firm's management in a systematic way reports information about the underlying economic conditions of the firm to external parties, such as shareholders, creditors, customers, and competitors. This course provides a comprehensive exploration of the role of accounting information in financial and product markets. Information can be both public and private and both types have an affect on the
functioning of stock and product markets. Public financial reports use the language of valuation, for example, by reporting values of assets and liabilities in the balance sheet, but the applicable rules for determining these accounting values are restricted by generally accepted accounting principles. Thus, the accounting principles can be viewed as an information system conveying information potentially useful for predicting the fundamental value of the firm - the valuation role. Valuation is an amalgamation of finance and accounting and this course introduces students to valuation based on financial models and accounting information. Students will attain an understanding of the relation between the market value of common stock and future accounting information as well as the relation between market price of common stock and contemporaneous accounting information. Students will also attain an understanding of how private investor information influences price, and thus what information can be gleaned from stock prices. When the actions of one market participant affect the outcomes of other players, the players will act strategically. Accounting plays an important role in affecting strategic interactions of which a study requires a basic understanding of game theory. Students will learn how basic gametheoretical concepts and methods can be applied to financial problems where asymmetric information is important. Students will learn about disclosure of private information by both diversified and undiversified owners in both capital and product markets.
COURSE SUBJECT AREAS:
1. Risk sharing and information in partnerships
2. Arbitrage and risk sharing in single- and multi-period markets
3. Public information in multi-period markets
4. Relation between market values and future accounting numbers
5. Relation between market values and contemporaneous accounting numbers
6. Private investor information in equity markets
7. Disclosure of private information in equity and product markets.
REQUIRED COURSES:
2. semester Accounting, 4725: Accounting for Decision and Control, 7010: Microeconomics I.
LECTURER:
Peter Ove Christensen and Hans Frimor.
TEACHING METHOD:
Lectures and discussion of cases.
LITERATURE:
Christensen, P. O., and G. A. Feltham: Economics of Accounting: Volume I - Information in Markets, Springer Science+Media, 2003.
Supplementary journal articles
(approx. 800 pages).
FORM OF ASSESSMENT:
Oral examination of 20 minutes' duration with 20 minutes' preparation time.
EXAMINATION AIDS ALLOWED:
All - except any means of electronic communication including PCs.
