Essay: The Economic Behavior Theory

Sample Essay

The economic behavior theory reflects how changes affect the economic behavior of entities. If amendments and improvements are made to accounting standards they would impact the economic behavior of firms in the long run. The moral hazards theory presents how biasness of one party in a contract or agreement can pose a risk towards the other party. If managerial decisions are based on personal benefits then managers tend to manipulate financial information which may result in improper application of financial standards.

This phenomenon can also be analyzed in light of decisions made by several executives of banks and financial institutions before the financial crisis. The compensation packages of executives were linked to the short term performance of executives which motivated these executives to inflate earnings values of mortgage assets. The executives of these banks invested heavily in risky assets which increased current earnings but mortgage assets were sure to fail due declining real estate prices of that time (Newman 2009). This does not necessarily mean that all manipulation and financial juggling is only performed by managers, lower level employees can also maneuver around regulations and procedures of internal control to commit fraud and steal millions of company dollars as highlighted in the article by David Richards (Richards 2009).

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