Under the debt hypothesis for accounting policy choice:
A) managers act in their own interests and therefore prefer more remuneration.
B) managers of entities with bonus plans prefer accounting policies that increase profit in the long-term.
C) managers have no discretion in choosing accounting policies relating to debt.
D) managers of entities with high leverage are likely to choose accounting policies that increase profit and equity.

Question

Quizplus · Accepted Answer

The debt hypothesis suggests that managers of entities with high leverage are likely to choose accounting policies that increase profit and equity in order to avoid debt covenant violations and maintain access to debt financing. This is because higher profits and equity would make their company appear more creditworthy and less risky to lenders. Therefore, option D is the best choice. Options A, B, and C do not accurately reflect the debt hypothesis.

Under the Debt Hypothesis for Accounting Policy Choice