Several scenarios illustrate how this problem might arise: 1. If the accounting system is part of the firm's efficient set of implicit and explicit contracts, accounting choice is endogenous. Contracting, invest- ment, and production decisions are determined jointly. The type of con- tracts used including the accounting methods depends on the firm's investment opportunity set. Hence, the firm's investment opportunity set e.
Smith and Watts find significant cross-sectioned correlations cimong " Mian and Smith forthcoming find that accounting policy decisions regarding consolidations vary by type of organization structure. Consumer finance subsidiaries are more prevalent where the parent is in the financial services industry and choice of consolidation is more homogeneous within like organization structures than in dissimilar structures. Also, operating Interdependencies between the parent and subsidiary drive some accounting choices.
January firms' investment opportunity sets, financial policies, dividend policies, and compensation policies. Most researchers, however, interpret these associations as resulting from opportunistic actions by managers cuid have not considered efficiency- based hypotheses. Accounting choice also is endogenous in the political process.
The poten- tial costs of a proposed accounting standard affect the standard before it is released. The correlation between financial and compensation policies and accounting policy is likely affected by the firm's tax accounting policies. While some financial accounting method choices do not eiffect taxes, reducing bookkeeping costs by keeping one set of books and the possibility that tax audits or future taxes might be levied using reported income induce a relation between financial accounting and tax account- ing methods.
For example, changing accounting methods can result from a change in the firm's investment oppor- tunity set causing the efficient contracts and accounting methods to change. Or, some exogenous event occurs such as reduced demand for the firm's products and managers take opportunistic actions to undo the adverse compensation and debt contract effects of the exogenous event. Accounting changes likely are due to both efficiency reasons and managerial opportunism.
Probing the relative im- portance of efficiency and opportunism for accounting method changes requires more refined theories and more linkage between the theory and the tests. Philosophy of Science Issues Positive theories are value-laden. Tinker et al. We concede the importance of values in determining research; both the researcher's and user's preferences affect the process.
Competition among theories to meet users' demands constrains the extent to which researcher values influence research design. Positive theories are "If Researchers choose the topics to investigate, the methods to use, and the assumptions to make.
Researchers' preferences and expected payoffs publications and citations affect their choice of topics, methods, and assumptions. In this sense, all re- " The Corporate Alternative Minimum Tax under the Tax Reform Act of requires a portion of reported income be in the tax base. This act Increases the tax incentives on financial reporting. Re- search to date has not documented the effect of tax reform on financial reporting incentives. Watts and Zimmerman—Positive Accounting Theory search, including positive research is "value-laden.
To the extent that the researcher's values inter- fere with the theory's ability to predict and explain, the theory's usefulness is reduced. Approach is a "sociology of accounting" instead of accounting theory. Christenson , 5 writes, "The program ofthe Rochester School is concerned with describing, predicting, and explaining the behavior of accountants and managers, not that of accounting entities. Christenson , 6 supports his criticism with an analogy from the physical sciences, "Chemical theory consists of propositions about the behavior of chemical entities molecules and atoms not about the behavior of chemists.
But, there would be no accounting without accountants, managers, or preparers ofthe numbers: there would be no numbers or systems to investigate because people "maintain" the system Lavoie Analogously, there would be no study of political science if politicians and voters were ignored. The study of accounting or political science is a social science Christenson , fn. An accounting theory that seeks to explain and predict accounting cannot divorce accounting research from the study of people.
The contracting approach to studying accounting requires researchers to understand the incen- tives of the contracting parties. Inappropriate methods are used for constructing explanatory theories. We apply traditional, generally accepted research methods and methodology from accounting, finance, and economics. Christenson , 6 states, "The Roches- ter School has drawn its concept of 'positive theory' from that guru of the Chicago School of Economics, Milton Friedman.
Watts and Zimmerman are not unique in owing intellectual alle- giance to the Chicago view. The majority of North American empirical ac- counting researchers would fall into this category, and their collective achieve- ments are formidable. This economics-based research methodology may be fundamentally flawed in ways we do not now understand.
But, accounting research using this methodology has produced useful predictions of how the world works e. In our opinion, Friedman plaees too much emphasis on prediction vis a-vis explana- tion. January behavior. Do we diseard something that works in some situations because it may not work in every cireumstance?
Despite what the critics think methodology should be, the methodologies that survive are the ones that produce useful theories. Competition in the marketplace of ideas will produce future research that uncover the errors of our present ways. Time will tell whether our approach is inappropriate.
Choice of the term "Positive Accounting Theory. Early examples include Gordon , Gordon et al. We applied the label "positive" to a set of existing research studies. The prime rea- son we attached this adjective in "Towards a Positive Theory of the Determina- tion of Accounting Standards" was to emphasize that accounting theory's role is to provide explanations and predictions for aceounting practice. In Watts and Zimmerman , 2 we state the objective of an accounting theory is to explain and predict accounting practice.
Neither prediction nor ex- planation is preeminent. We adopted the label "positive" from economies where it was used to distinguish research aimed at explanation and prediction from research whose objective was prescription. Given the connotation already attached to the term in economics we thought it would be useful in distinguishing aceounting research aimed at understanding accounting from research directed at generating prescriptions.
In the s researchers were still debating various normative theories of accounting Chambers ; Sprouse and Moonitz Our use of the term "positive" differentiated our and other people's positive research from traditional normative theories by emphasizing the importance of prediction and explanation.
It helped place normative theories and their role in a clearer perspective. Our work was not directly related to the debate over alterna- tive normative theories and we wanted to differentiate our work from that debate. The phrase "positive" created a trademark and like all trademarks it conveys information. A positive theory differs from a normative theory, though a positive theory can have normative implications once an objective function is specified Jensen In retrospect, the term "positive" generated more confusion than we antici- pated.
For example, some thought we meant logical positivism Christenson We merely intended to distinguish positive propositions from the extant normative propositions in the literature.
While the term "positive" avoided de- bates over normative uses of the work, the term "positive" generated consider- able debate over philosophical issues. Despite its problems, we prefer "positive accounting literature" to alterna- tive terms that have arisen, partieularly the term "economic consequences liter- ature. Several papers listed in Table 1 involve a debate over what constitutes "proper" methodology Tinker et al. Christen- son , 1 coneludes, ". ITJhe standards advoeated by the Rochester School for appraisal of their own theories are so weak that those theories fail to satisfy Popper's proposal for demarking science from metaphysics.
Hines , argues these methodology issues are important and if ignored will "harmfully limit the nature Eind domain of ac- counting research. Researchers have not changed their approach. Referees and editors of journals have not asked researchers to alter their methodoiogy based on these published critiques. There are at least three reasons these criticisms have had little effect on published research.
First, the criticisms are written in an abstract fashion. Instead of just criticizing extant papers, if the critics would repeat studies without making the alleged errors, then users of the corrected research would demand such procedures be followed in the future. If the alleged errors are important to users, then other researchers, edi- tors, and referees would adopt the suggestions.
Second, critics who place unrea- sonable demands on studies cause other researchers to disregard their com- plaints. For example, Hines , argues that Watts and Zimmerman should have: 1 avoided crude proxies, 2 avoided unrealistic assump- tions, 3 investigated the anomalies, 4 clarified their theories, and 5 rigorously tested their theories against competing hypotheses.
All these standards are rele- vant, but if all were applied rigorously to individual papers especially early papers in an area of thought , no research would be published. Third, to most researchers, debating methodology is a "no win" situation because each side argues from a different paradigm with different rules and no common ground.
Our reason for replying here is that some have mistaken our lack of response as tacit acceptance of the criticisms. Summary and Conclusions Our prime objective in this paper is to provide a perspective on our and Accounting Review papers.
The paper has proven more important than the "Excuses" paper. Based on citations, the paper has received over three times as many citations as the paper Brown and Gardner , The paper was a catalyst for research into the choice of accounting meth- ods. Except for generating debates over methodology, the "Excuses" paper has remained outside the mainstream of accounting research probably because of the more subjective type of evidence necessary to test theories of the effect of accounting research on policy.
The debate over methodology has been less useful than the discovery and explanation of empirical regularities. The positive accounting literature has dis- covered seversd empirical regularities in accounting choice and provided an explanation for them. The methodology we and the sub- sequent literature use is the methodology of economics, finance, and science generally. This methodology has been successful in accounting and we feel no necessity to apologize for it.
Under this methodology, a theory is not discarded merely because of some inconsistent observations. The best theory is determined in a competition to meet the demand from students and practitioners for theories that explain and predict accounting choice. It is unlikely an accounting or a social science theory with perfect predictions will ever exist.
Researchers are influenced by their values. But, to the extent those researchers are competing to meet student and practitioners' demand for theories, they have incentives to reduce that influence. Further, the careful dichotomy between theory and prescription helps reduce that influence.
Lastly, accounting is an activity carried out by people and one cannot generate a theory that predicts and explains accounting phenomena by ignoring the incentives of the individuals who account. In this final section we summarize the contributions made by this literature, our views on promising research directions, and some conclusions. Positive Accounting Literature Contributions Discovering systematic patterns in accounting choice outlined in the preced- ing sections and providing specific explanations for the patterns Eire the litera- ture's major contributions.
However, we believe the literature has made other contributions: it provides an intuitively plausible framework for understanding aceounting. A plausible framework is a useful pedagogy for teaching accounting. The literature also encourages researchers to address accounting issues and emphasizes the central role of contracting costs in accounting theory. The literature explains why accounting is used and provides a framework for predicting accounting choices.
Choices are not made in terms of "better mea- surement" of some accounting construct, such as earnings. Choices are made in terms of individual objectives and the effects of accounting methods on the achievement of those objectives. For example, some accounting instructors teach that certain accounting methods e. But, no explanation is offered why these "better" measures are not adopted.
The positive accounting literature takes as given the proposition that the accepted set maximizes the wealth of the contracting parties and then seeks to understand how wealth is affected by specific accounting methods. The literature's emphasis on predicting and explaining accounting phenom- ena encourages research that is relevant to accounting.
One of the first questions one pursuing this approach asks of a new model is whether it has any relevance to predicting and explaining accounting practice. Another contribution of the literature is to highlight the importance of con- tracting costs including information, agency, bankruptcy, and lobbying costs.
Contracting costs have long been important in economics and date to Coase Positive accounting research has more recently recognized the impor- tance of contracting costs to explain accounting.
In the late s and s. To explain such institutional differences requires assumptions of costly information and con- tracting. Likewise, accounting would not exist without contracting costs and so it is difficult to produce a theory that predicts and explains accounting without making assumptions about the relative magnitudes of these costs.
The central role of contracting costs highlighted by positive accounting research makes it difficult to ignore these costs in accounting theories. It directs researchers' atten- tion to the appropriate issues. Future Research Directions Section II discussed two major research methods issues: the lack of power of the tests and alternative economic explanations for the empirical regularities.
The following research suggestions focus on these two issues. We believe these suggestions will be more fruitful in advancing the understanding of accounting choice than "merely conducting more studies using existing formulations of the theory and existing ways of measuring variables'' Christie forthcoming also see Holthausen and Leftwich , First, the single most important task facing positive accounting researchers is improving the linkage between the theory and empirical tests.
The theory pre- dicts that the magnitude of debt renegotiation costs will affect managers' choice of accounting methods and will set an upper bound on the magnitude of the de- fault costs. To date, researchers have been unable to document the magnitude of the costs imposed by a technical violation of a debt covenant or the magnitude of renegotiation costs Holthausen ; Leftwich ; Lys ; Leftwich forth- coming.
Greater attention has to be placed on developing a unified theory that incorporates both the ex ante efficient restrictions on the managers' accepted set of accounting methods and the ex post exercise by managers of their discretion to choose accounting methods from within the accepted set. The empirical tests can no longer assume accounting choice is made for either efficiency or oppor- tunistic reasons.
Both must be incorporated into the tests. Also, estimates of the relative magnitudes of the various components of contracting costs can help to further refine the linkage between the theory and tests by identifying those costs most infiuential in driving accounting choice. Developing and testing alternative hypotheses for the existing empirical reg- ularities also will enhance the linkage between the theory and the tests. Hypotheses can be developed to predict new empiricai regularities.
Under the contracting approach, debt and compensation contracts are only some of the contracts that affect firms' cash flows. Other explicit and implicit contracts can be used to develop new predictions DeAngelo a.
Particularly promising is the effect of accounting procedures for internal control on external reporting Ball Mian and Smith forthcoming find that the prevalence of consolidated reporting of financing subsidiaries depends on the extent to which the subsidiary is interdependent with the parent's main business.
How the firm is organized internally e. January nal contracting parties may well turn out to be as important a determinant of external financial reporting as the external contracting parties.
Finally, the political process can affect flrms' cash flows other than via the simple political cost hypotheses.
More detailed specification of government regu- latory processes that rely on accounting numbers can be used to develop new hypotheses and a tighter linkage between the theory and tests by suggesting more precise proxy variables other than flrm size Sutton ; Wong ; Jones Second, when accounting choice is cast as part of the efficient contracting technology, variables often used to explain and predict accounting choice are endogenous.
For example, changes in accounting procedures occur simulta- neously with changes in the firm's investment opportunity set, its flnancial and compensation contracts, its organizational structure, and even in its political en- vironment.
Managers choose packages of accounting policy,flnancicilpolicy, and organizational structure including performance evaluation and reward sys- tems.
Theoretical and empirical models have to be developed to sort out the endogencity problems among the variables and, thereby, increase the power of the tests. While this is no easy task, it seems essential to significant advances in both the theories of the firm and of accounting.
Accounting numbers are used in different ways across industries. Besides the obvious regulatory uses of accounting numbers in flnancial institutions and public utilities, differences in industries' opportunity sets are likely to affect the accepted set of accounting methods. Two types of studies are likely to prove use- ful and again increase the tests' power.
First, studies investigating differences in investment opportunity sets e. Second, intra-industry studies of accounting choice while requiring significant amounts of industry-speciflc knowledge by the researcher, have the potential of generating useful insights about the magnitude of contracting costs.
Third, measurement errors in net accruals can be reduced to increase the tests' power. This requires a model of net accruals not subject to managerial ac- counting discretion Kaplan ; McNichols and Wilson ; DeAngelo b; Moyer Also, replacing the simple indicator variables used to represent a bonus plan or an accounting-based debt covenant with continuous variables that better measure the relative magnitudes of various contracting eosts will probably increase the theory's predictive power.
Conclusions While the positive accounting literature has yielded empirical regularities and explanations for these regularities, it is clear there are many research oppor- tunities available beyond those currently exploited. The tests of the debt, bonus. Incorporating both ex ante contracting efflciency incentives with ex post redistributive effects is likely to prove useful.
The major breakthroughs are likely to come from viewing account- ing as a choice that is endogenous with the choice of organization, contracting, and financial structures. Such a breakthrough will be difficult to achieve, but important foundations can be laid by stressing the linkage between the theory and the empirical tests and by investigating inter- and intra-industry variations in accounting methods and other organizational choices.
References Alchian, A. Uncertainty, evolution and economic theory. Journal of Political Economy. June : Production, information costs and economic organization. American Economic Review. December : Changes in accounting techniques and stock prices. Journal ofAccounting Research. Supplement : Discussion of accounting for research and development costs: The impact of research and development expenditures. Journal of Accounting Research. Supple- ment : Accounting, auditing and the nature of the firm.
Working paper. William E. Simon Graduate Schooi of Business Administration. University of Rochester. An empirical evaluation of accounting income numbers.
Jour- nal of Accounting Research. Autumn : Corporate financiai reporting: A methodological review of em- piricai research. The information content of annual earnings announcements. Joumai of Accounting Research. Debt covenants and accounting choice. Capital markets research in accounting during the s: A critical re- view. University of Michigan. Determinants of the corporate decision to capitEdize interest.
August : Using citation analysis to assess the impact of Jour- nals and articles on contemporary accounting research CAR. Joumai ofAccounting Research. Spring : Chambers, R. Accounting, evaluation, and economic behavior.
On cross-sectional analysis in accounting research. Aggregation of test statistics: An evaluation of the evidence on contracting and size hypotheses. Christenson, C. The methodology of positive accounting. The Accounting Review. January : The nature of the firm. November : Daley, L. Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders.
July : Managerial competition, information costs, and corporate governance: The use of accounting performance measures in proxy contests. Discussion of evidence of earnings management from the provision for bad debts.
An empirical examination of debt covenant restrictions and accounting-related debt proxies. Separation of ownership and control. Joumai of Law and Economics. Agency problems and residual claims. Joumai of Law and Eco- nomics. Accounting policy decisions and capital market research. March : The methodology ofpositive economics, essays in positive eco- nomics.
Phoenix Books. Frost, C. The role of debt covenants in assessing economic conse- quences of limiting capitalization of exploration costs. October : Purchase versus pooling of interest: The search for a predictor. Postulates, principles and reseeirch in accounting. April : Accounting measurements and normal growth of the firm. Research in accounting measurement.
Jaedicke, Y. Nielsen, American Accounting Association. The effect of bonus schemes on accounting decisions. Popper's methodology of falsiflcationism and accounting research. Evidence on the effect of bond covenants and management com- pensation contracts on the choice of accounting techniques: The case of the depreciation switch-back.
Accounting method choice: Opportunistic behavior, efficient contracting and information perspectives. The economic consequences of accounting choice: Impli- cations of costly contracting and monitoring. Theory of the firm: Managerial behavior, agency costs and ownership structure.
Journal of Financial Economics. The effect of foreign trade regulation on accounting choices, and produc- tion and investment decisions. Stockholder-bondholder conflict and dividend constraints. Comments on Paul Healy: Evidence on the effect of bonus schemes on accounting procedure and accrual decisions.
Klein, B. Contracting costs and residual claims: The separation of ownership cuid con- trol. Crawford, and A. Vertical integration, appropriable rents, and the competitive contracting process. A dictionary for accountants. The accounting of interpretations and the interpretation of accounts: The communicative function of "the language of business. Johnson, Orace Johnson. Evidence of the impact of mandatory changes in accounting principles on corporate loan agreements. Accounting information in private markets: Evidence from private lending agreements.
Aggregation of test statistics: Statistics vs economics. Watts, and J. Voluntary corporate disclosure: The case of interim reporting.
Market-based empirical research in accounting: A review, interpretation, and extension. Liberty, S. Labor union contract negotiations and account- ing choices.
Simple theories for complex processes: Accounting policy and the market for myopia. Journal of Accounting and Public Policy. Lys, T. Mandated accounting changes and debt covenants: The case of oil and gas accounting. Malmquist, D.
Efficient contracting and the choice of accounting method in the oil and gas industry. Bell, and J. Management preferences over ac- counting standards: A replication and additional tests. Octo- ber : McNichols, M.. Evidence of earnings management from the provision for bad debts. Meckling, W.. Knowledge, control and organizational structure.
Mian, S. Incentives for unconsolidated financial reporting. Modigliani, F. The cost of capital, corporation finance and the theory of investment.
American Economic ReuieuJ. Moyer, S. Accounting choices in commercial banks. Dissertation, University of Rochester. Myers, S. Determinants of corporate borrowing. Peltzman, S. Toward a more general theory of regulation.
Popper, K. The logic of scientific discovery. Press, E.. Accounting-based constraints in public and private debt agreements: Their association with leverage and impact on accounting choice.
Ricks, W. Market assessment of alternative accounting methods: A review of the em- pirical evidence. Journal of Accounting Literature. Smith, C. On the theory of financial contracting: The personal loan market. Jour- nal of Monetary Economics. On financial contracting: An analysis of bond covenants. Incentive and tax effects of U.
Australian Journal of Management. Investment opportunity set emd corporate policy choices. Sorter, G. Becker, T.
Archibald, and W. Accounting and finan- cial measures as indicators of corporate personality—some empirical findings. Re- search in accounting measurement. Ijiri, and O. Sprouse, R. A tentative set of broad accounting principles for busi- ness enterprises. The paper produced a methodological debate that has not been very productive.
This paper attempts to remove some common… Expand. Save to Library Save. Create Alert Alert. Share This Paper. Background Citations. Methods Citations. Results Citations. Citation Type. Has PDF.
Publication Type. More Filters. This paper reviews the positive accounting theory. The article also discusses development in accounting theory and research. The philosophical objective of positive accounting theory is to explain … Expand.
This chapter aims to put light on the positive accounting theory and related empirical studies and identify its broad contributions to the accounting research. Our objective is to provide a review of … Expand.
Highly Influenced. View 7 excerpts, cites background and methods. Positive Accounting Theory and Science. This paper examines the development of positive accounting theory PAT and compares it with three standard accounts of science: Popper , Kuhn , and Lakatos PAT has been one of … Expand. This paper is devoted to the theoretical and empirical study seeking to explain the choice of accounting strategies made by the Algerian companies in the framework of positive accounting theory … Expand.
View 3 excerpts, cites background. This paper offers a summary of the evolution of financial accounting theory and its contribution to accounting standard setting, but with special emphasis since the work of Ball and Brown The … Expand. Financial Statements and Positive Accounting Theory.
The Early Contribution of Aldo Amaduzzi. This paper examines some of the accounting ideas that were developed in the late s by an Italian professor, Aldo Amaduzzi, with regards to positive accounting studies and the content of financial … Expand. View 2 excerpts, cites background. Positive accounting theory PAT has been one of the most influential accounting research programs during the twentieth century. This paper examines the development of PAT and compares it with three … Expand.
Abstract This paper examines some of the accounting ideas that were developed in the late s by an Italian professor, Aldo Amaduzzi, with regards to positive accounting studies and the content of … Expand.
Chambers and Continuously Contemporary Accounting. The thesis is an exploratory study of the gap between accounting research and financial reporting practices. The fundamental issue is that comprehensive accounting theories CATs have been largely … Expand.
0コメント