Positivistic tendencies: Human Nature or Scientific Necessity

Differentiate between a positive and normative accounting theory * Positive Theory seeks to explain and predict particular phenomena * Focuses on relationships between various individuals and how accounting is used to assist in the functioning of these relationships * Normative Theory prescribe how a particular practice should be undertaken

Identify the origins of Positive Accounting Theory (PAT) * Assumption: All individual action is driven by self-interest opportunistic behaviour increase wealth does not incorporate notions of loyalty or morality * 1960s: paradigm shift from normative theories * Efficient Markets Hypothesis: capital markets react in an efficient and unbiased manner to publicly available information * Ball & Brown paper: investigated stock market reaction to accounting earnings announcements crucial to the acceptance of the positive research paradigm * Agency theory: explained why the selection of particular accounting method might matter focus: relationship between principals and agents information asymmetries create much uncertainty acceptance of transaction costs and information costs * Relies on traditional economics literature assumptions of self-interest and wealth maximization without having contractual agreements between the agents and the principal the agent will receive a reduced income agents then motivated to enter contracts which appear to limit actions detrimental to agents agency costs: Monitoring costs, bonding costs and residual loss

Hypothesis used in PAT literature to explain, and predict support or opposition to, an accounting method: * Bonus plan hypothesis: Managers of firms with bonus plans are more likely to use accounting methods that increase current period reported income * Debt