Where accounting choices do not have a direct cash flow effect, managerial incentives arise. This occurs, for example, where accounting choices impact share prices via their effect on the firm's expected political costs (a function of reported profits) or debt default/renegotiation costs. It is thus predicted that the managers of firms with high political costs will select current income-reducing accounting methods and that the managers of firms with high agency costs of equity and debt will choose current income-increasing methods. In the efficient contracting setting, contracts which minimize agency costs may encourage earnings management. The contracts are, nevertheless, efficient as they result in firm value maximization. In practice, it is difficult to distinguish hypotheses based on this perspective from those generated in the opportunistic behaviour setting (Beattie et al., 1994; Florou, 2004).