Question: Refer to Theory in Practice 11 2 concerning General Electric Co

Refer to Theory in Practice 11.2, concerning General Electric Co. (=GE). In particular, consider the strong negative market reaction to lower reported earnings in April 2008.

a. Why did GE’s share price fall?
b. GE’s previous policy of managing earnings so as to report a steady increase can be interpreted as “ =good” earnings management ( see Problem9). Outline the argument why earnings management by complex firms such as GE can provide useful and credible information to investors. Use the concept of blocked communication in your answer.
c. Suppose that GE had adopted Mr. Welch’s urging to report increased earnings this quarter? Would this have been consistent with its reputation for good earnings management? Explain why or why not.

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