Furthermore, they assert that firm's attributes, such as leverage and size, are predictive variables of the firm's accounting choice.
When published, the pioneering articles were greeted with considerable criticism.
They adopted the label positive from the economics to distinguish accounting research aimed at understanding accounting from research directed at generating prescriptions.
By doing so, they can increase their bonuses for the current year.Howell published Higher education for business and Franck.He found that the flow of info increase in the earnings announcement periods.Sterling 40 The author argues that PAT is subjected to scrutiny; its pillars (value-free study and accounting practices) are found to be insubstantial.While normative theories tend to recommend what should be done, Positive Theories try to explain and predict o Actions such as which accounting policies firms will choose o How firms will react to newly proposed accounting standards.Opportunistic perspective edit, is blackjack the best odds the opportunistic perspective holds the view that managers, who are agents to the principal, act to their self-interests.Watts and Zimmerman 17 This paper analyses; The demands for accounting theories in an unregulated economy than in a regulated economy,.e., the additional demands generated by government intervention; and The supply of accounting theory.It has been defended that this theory is scientifically wrong and its predictions do not always hold.Measurements and proxies being used in its empirical researches have a simplistic nature.High profitability can lead to increased political heat, and can lead to new taxes or regulations esp.
SPEs (Enron capitalize operating expenses (WorldCom).
Verrecchia 33 Discretionary disclosure.
We conclude that this theory has generated several useful insights on managers' reporting decisions.419) 19, Empirical studies of positive accounting studies test whether managers make accounting method changes or accrual estimates to reduce the costs of violating bond covenants written in terms of accounting numbers, to increase the value of earnings-based bonuses under compensation contracts, or to reduce.Opportunistic and efficiency perspectives of PAT are distinguished.In 1976, the publication of Jensen and Merckling's article on agency theory had a major impact on PAT.Table 4 presents an overview of some criticisms.Kothari 3 Review of capital markets research in accounting.EMH and capm are explained.These are forecasting earnings, contracting process, compensation plans, debt contracts, political process, empirical tests of accounting choice, stock price tests of the theory, and the theory's application to auditing.Political cost hypothesis edit The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries.Firms are viewed as the accumulation of the contracts they have entered into.Positive accounting can be associated with the contractual view of the firm.The former report was commissioned by Ford Foundation and the latter by Carnegie Foundation.They believe that management plays a central role in the determination of standards.This theory is based on work undertaken in economics and is heavily dependent on the efficient market hypothesis, the capital assets pricing model, and agency theory.1 2, the firm is viewed as a nexus of contracts and accounting one tool to facilitate the formation and performance of contracts.The development of positive accounting theory In this section, we examine the development of the PAT, the contribution of major works of Watts and Zimmerman, and the hypotheses of this theory.
These are bonus plan hypothesis (or management compensation hypothesis the debt/equity hypothesis (or debt hypothesis and political cost hypothesis.
Efficiency perspective edit, the efficiency perspective is taken into Positive Accounting theory as researchers explain how various managers choose accounting methods that show a true representation of the firm's performance.
The firm will choose the accounting policies that best acknowledge the need for minimization of contract costs.
Changing accounting policies, managing discretionary accruals, timing of adoption of new accounting standards.
As an example, absent conservatism, managerial compensation agreements may reward managers based on current reports that later evidence indicates were unwarranted.