Efficient Contracting Theory and Accounting

a) Explain the idea of the firm being a nexus of contracts. (2 Marks)

b) Using Positive Accounting Theory (or Efficient Contracting Theory) give three reasons why managers of some firms opposed the expensing ESOs before it became mandatory. (3 Marks)

c) Using Positive Accounting Theory (or Efficient Contracting Theory) give one reason why a firm might have voluntarily adopted expensing ESOs before it became mandatory. (2 marks)

d) Using Positive Accounting Theory (or Efficient Contracting Theory) why do debt contracts impose covenants based on accounting information? (3Marks)

e) Use Positive Accounting Theory (or Efficient Contracting Theory) to explain how conservatism can contribute to efficient debt contracts. (3 Marks)