The efficient market hypothesis (EMH) states that market participants (Analysts) are able to efficiently and simultaneously interpret and clean the information noise resulting from management discretion in choosing among accounting rules.
Yet corporate managers act as if they do not believe in the EMH. In that, they lobby (spend much money and time) at accounting regulators to favor one alternative over the other.
- Are managers acting irrational? If not, then what is are the underlying motives?
- Are lending institutions and bond buyers Naive? If not, how do they protect their interests?