Information Asymmetry

In: Business and Management

Submitted By gushu
Words 383
Pages 2
Information asymmetry is an overarching theme in accounting theory, which plays a significant role in the issues developed in this article. Asymmetry affects the reliability of information that will be delivered to other people. The managers of Diamond Foods were providing information to some people that they were not willing to share with people on the outside of the organization and to some extent people on the inside as well. For example, Diamond Foods was moving grower payments into different periods, so the growers did not even know what they are being paid for. Also investors and the public always believed that the company way reaching its growth targets, managers were actually engaging in income manipulation. This embodies the idea of moral hazard, where the investor cannot determine whether a manager is shirking their role or acting with the investors' best interests in mind. Investors rely on financial information to tell them what is going on internally, and make decisions based on the good news or bad news presented by these statements, and other sources to information from the company. As demonstrated, an investor cannot learn everything there is to know about a company from the financials; as a result, investors will assess the firm with an amount of estimation risk, lowering the price they will pay for the stock. Diamond Foods' admission of incorrect accounting will mislead speculation of stock and the performance of the whole firm. The lack of reliable information provided to investors and the public over the last three years led to their failure to make accurate forecasts, and ultimately lower the price of the stock.

Management information is a useful way to prevent these problems if Diamond Foods decides to disclose information. If Diamond Foods provides information on the past, present, future of projects and other relevant events inside and…...

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