Efficient Market Hypothesis An

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to agents. An example can be given in lending: A high-risk company has high monitoring costs, which leads to a high interest rate. Another example would be the reputation of the manager: Has he got a bad reputation, than his salary would be lower than usual. Agents try to reduce monitoring costs by installing mechanisms to guarantee that they will behave in the interest of the principal or by proposing to compensate principals for their losses.
(2) The mechanisms mentioned above are bonding costs, because they are the costs of bonding the agent’s interest to the principal’s. Quarterly financial reports are bonding costs, namely the time and effort invested to generate the financial report. Agents will normally weigh bonding costs with monitoring costs and chose the cheaper alternative.
(3) Despite bonding and monitoring costs, it is still likely that agents’ interests will not correspond exactly with the principals’. If the manager is not motivated and does ...

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a knowledgable, willing buyer and a knowledgable, willing seller in an arm’s length transaction” (AASB 1013). This leads to the principle of presenting a true and fair view of the company. If this aim could be achieved, than investors should gain full confidence in the integrity of markets, reducing their monitoring and bonding costs, which should result into a reduction of the cost of capital.

But the production of accurate information is tricky, because accuracy is defined as relevant and reliable, but both criteria are based on each other. Their reasoning is circular.

Then, comparability of information needs an explanation. This leads into either one standard for ...

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