Research Papers Positive Accounting Theory

Research Papers Positive Accounting Theory-23
Our literature review is organized around ideas of PAT, its hypotheses, supporters and followers, and finally critiques of this theory.The remaining part of this chapter proceeds as follows: We first examine the forces that give rise to this theory.

Our literature review is organized around ideas of PAT, its hypotheses, supporters and followers, and finally critiques of this theory.

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In other words, their major aim is to explain and predict why managers and accountants choose particular accounting methods in preference to others.

Furthermore, they assert that firm's attributes, such as leverage and size, are predictive variables of the firm's accounting choice.

The positive accounting theory (PAT) relied in great part on work undertaken in economics and was heavily reliant on the efficient market hypothesis, the capital assets pricing model, and agency theory.

PAT has led to a large amount of empirical studies.

In 1976, the publication of Jensen and Merckling's article on agency theory had a major impact on PAT [14].

In agency theory, the firm is analysed as “a nexus of contracts” and this concept is accepted by positive accounting research.Academic studies on the factors that affect a firm's accounting choices triggered a paradigm change in accounting research, altering the nature of literature from prescriptive to predictive.The construct of the new paradigm was first articulated by Ross Watts and Jerold Zimmerman with the publication of their revolutionary articles in —“Towards a Positive Theory of the Determination of Accounting Standards” in 1978 and “The Demand for and Supply of Accounting Theories: The Market for Excuses” in 1979.Positive researchers empirically test their predictions around the bonus plan hypothesis, the debt covenant hypothesis, and the political cost hypothesis.These hypotheses can be used in two distinguished forms of positive accounting theory.Boland and Gordon assert that this economic-based accounting theory is a combination of Milton Friedman's instrumentalism and Paul Samuelson's positivism [15].They also add that Watts and Zimmerman practise the methodology as that of the Chicago School economists [6, 15].The term “Positive Accounting Theory” has come to practise to refer to the accounting theory developed and named by Watts and Zimmerman.The authors seek to appreciate and explain the concept of economic consequences of the interests of managers and financial accounting and reporting.We conclude that this theory has generated several useful insights on managers' reporting decisions.In this section, we examine the forces and the publications that had a major impact on the emergence of PAT.

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