The Footnote Outlining the Portfolio of Accounting Choices Is One

question 97

True/False

The footnote outlining the portfolio of accounting choices is one of the first footnotes in the financial statements.

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Definitions:

Adverse Selection

Adverse selection is a situation in economics where one party in a transaction has more information than the other, often leading to an imbalance and unfavorable outcomes for one side.

Screening

A solution to the problem of adverse selection that describes the efforts of a less informed party to gather information about the more informed party. A successful screen means that it is unprofitable for bad types to mimic the behavior of good types. Any successful screen can also be used as a signal.

Signaling

A solution to the problem of adverse selection that describes an informed party’s effort to communicate her type, risk, or value to less informed parties by her actions. A successful signal is one that bad types won’t mimic. Any successful signal can also be used as a screen.

Anticipate Adverse Selection

The practice of predicting and mitigating the likelihood of selecting undesirable risks due to information asymmetry.