accounting questions

3 accounting questions, to be done ASAP

total answer should not be longer than 2 pages

  

Q1. 

Describe what is meant by the naive investor hypothesis and the no-effects hypothesis 

in relation to firms’ accounting policy changes. 

 

Q2. 

Firms often borrow funds from lenders (i.e., debtholders) to finance their investments 

and activities. However, this can create incentives for firms to take actions that are 

opportunistic, such as claim dilution and asset substitution. 

REQUIRED: 

(a) What is meant by claim dilution and asset substitution? 

(b) Who ultimately bears the (agency) costs if the firm engages in these opportunistic 

actions and why? 

(c) In relation to accounting, how can the interests of the firm and debtholders be 

aligned? 

 

Q3. 

Explain why managers would have an incentive to choose income decreasing 

accounting methods when there are (complex) bonus plan arrangements that pay 

bonuses if reported earnings are between lower and upper bounds