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Constructing an information system 99989796 Domtargoodbadgoodbad Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good.

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Presentation on theme: "Constructing an information system 99989796 Domtargoodbadgoodbad Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good."— Presentation transcript:

1 Constructing an information system Domtargoodbadgoodbad Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good

2 Constructing an information system DomtargoodbadgoodbadGiven future profitability is good…. Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good

3 Constructing an information system DomtargoodbadgoodbadGiven future profitability is good, what is probability that current period was good? (4/9) …bad? (5/9) Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good

4 Constructing an information system DomtargoodbadgoodbadGiven future profitability is bad…. Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good

5 Constructing an information system DomtargoodbadgoodbadGiven future profitability is bad what is probability that current period reports good news? (=4/6) …bad news? (=2/6) Norandabad goodbad Nortelgood Bombardierbadgood bad Cdn Tiregoodbad good

6 So….

7 Constructing an information System The previous example illustrates how an information system could be portrayed using “real” data. In such a case, we don’t know what the “true” state was (eg. High or low)-we only know what was reported by the company (good news or bad news). This is because the state of nature for each company is not publicly observable. Thus, this is different than the information systems in the book which could capture the connection between the future REAL state and the current REPORTED state.

8 Note that the information system portrays the CONNECTION between future profitability and current news. It says GIVEN that future profitability is high, what is probability that current f/s show good or bad news. It does NOT tell you anything about the chances that a company will be in a good or bad state. So, if an event happens that changes the profitability of the company, it won’t have any effect on the information system probabilities. It increases the likelihood of having a good state, but doesn’t change the CONNECTION between future states of nature and current reporting. What WOULD change the information system would be a change in accounting standards, for example, that strengthen the predictive value, relevance or reliability so that the CONNECTION between future profitability and current news is higher.

9 Constructing an information System If we could observe the state of nature, it is possible that companies could report something (GN or BN) different from the state of nature, but this would be odd as we would know they were lying. Still, if there were no penalties for lying, maybe we would see something like this….

10 Constructing an information system DomtarHigh GN Low BN High GN Low BN In this case, you could still construct an information system in the same fashion as before. You would look at the connections between the actual state in one year and the reported state the year before. NorandaLow BN Low BN High GN Low GN NortelHigh GN High GN High BN High GN BombardierLow BN High BN High BN Low GN Cdn TireHigh GN Low BN Low GN High GN


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