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QUESTION

The manager of Golden Ray Corporation receives a bonus if company profits exceed $1,000,000 this year.

increase reported profits from $950,000 to $1,025,000, triggering his bonus. The change in profits of $75,000 will reverse itself in the next year, and the accounting change has no impact on Golden Ray's cash flow. Discuss the above situation as it relates to both an agency problem and efficient markets.

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