Positive Accounting Theory

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Positive Accounting Theory
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PAT Concept
Efficient Market Hypothesis (EMH)
Agency Theory
Positive Accounting Theory (PAT)
Normative Theory
Bonus Plan Hypothesis
Political Cost Hypothesis
Debt Covenant Hypothesis
Accounting Standards and Practices
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Positive Accounting Theory

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• Watts and Zimmerman in 1978 and 1986
• Apply to Positive Theory of Economic

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Normative Theory

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Positive Accounting Theory

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Agency Theory

• The agent (like the principal) will be driven by
  self-interest, and therefore the principals will
  anticipate that the manager, unless restricted
  from doing otherwise, will undertake self-serving
  activities that could be detrimental to economic
  welfare of the principals.

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Efficient Market Hypothesis (EMH)

• The capital markets react in an efficient and
  unbiased manner to publicly available
  information.

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Positive Accounting Theory

• Assumptions
• The accountants (and, in fact, all individuals)
  are primarily motivated by self-interest (tied to
  wealth maximisation), and that the particular
  accounting method selected (where alternative
  are available).

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The Three Hypotheses

1. The Bonus Plan Hypothesis
2. The Debt Covenant Hypothesis
3. The Political Cost Hypothesis

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The Bonus Plan Hypothesis

• Bonus based on net income
• To get more bonus, choosing accounting methods
  that increase current reported earnings

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The Bonus Plan Hypothesis

• All other things being equal, managers of firms
  with bonus plans are more likely to choose
  accounting procedures that shift reported
  earnings from future periods to the current period

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The Bonus Plan Hypothesis

• Because of the nature of of the accrual process,
  this will tend to lower future reported earnings
  and bonuses, other things equal.
• PV of managers utility from future bonus stream
  will be increased by shifting earnings toward the
  present

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The Bonus Plan Hypothesis

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The Debt Covenant Hypothesis

• All other things being equal, the closer a firm
  is to violation of accounting-based debt
  covenants, the more likely the firm manager is to
  select accounting procedures that shift reported
  earnings from future periods to the current period

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The Debt Covenant Hypothesis

• Violation of debt covenant is costly
• Restriction on dividends
• Limit additional borrowing
• Issuance of stock,
• Increase current earnings
• ? Assets increase
• To avoid violation

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The Debt Covenant Hypothesis

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The Political Cost Hypothesis

• All other things equal, the greater the political
  costs (taxes, regulations) faced by a firm, the
  more likely the manager is to choose accounting
  procedures that defer reported earnings from
  current to future periods

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The Political Cost Hypothesis

• Large firm with high profit attracts media,
  consumers, and politicians attention
• Large firm trend to reduce profit reports

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The Political Cost Hypothesis
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Theory Perspectives

• Opportunistic Perspectives
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• Efficiency Perspectives
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Criticisms

• Not improving accounting pratices
• Not value free
• Not positive thinking for humankind

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PAT Concept
Efficient Market Hypothesis (EMH)
Agency Theory
Positive Accounting Theory (PAT)
Normative Theory
Bonus Plan Hypothesis
Political Cost Hypothesis
Debt Covenant Hypothesis
Accounting Standards and Practices
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• ????????????????(????????????) ?????? Positive
  Accounting Theory
• Bonus Plan Hypothesis
• Deb Covenant Hypothesis
• Political Cost Hypothesis

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