Questions:

Question 1.

Agency Theory identifies one of the problems in the lender-manager agency relationship to be asset substitution. In your own words, describe this problem, the risks it poses, and potential solutions to manage the problem.

Question 2.

Legitimacy theory can provide an explanation for voluntary disclosures in annual reports. Make an argument to support this and include a specific example, theoretical or from the real-world, to demonstrate your point.

Question 3.

Earnings management has been described by Healy and Wahlen (1999) as occurring when:

'..managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about underlying economic performance of the company, or to influence contractual outcomes that depend on reported numbers'.

Explain what this definition of earnings management means. Include specific examples to demonstrate your point.