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Economic consequences and positive accounting theory try to explain why managers care about accounting policy choices and to predict how managers will respond to changes

Economic consequences and positive accounting theory try to explain why managers care about accounting policy choices and to predict how managers will respond to changes in accounting standards.

Required:

a) Explain the relation between economic consequences and contracting, and between contracting and the moral hazard problem.

b) A current debate in accounting practice is whether rules-based or principles-based GAAP (generally accepted accounting principles) is preferable. Which do you think is preferable from the perspective of economic consequences and efficient contracting between investors and managers? Why?

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