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Positive Accounting Theory Essay

1095 Words5 Pages

DEVELOPMENT OF POSITIVE ACCOUNTING THEORY
Positive accounting emerged with empirical studies that boomed in accounting in the late 1960s. Positive Accounting was organized as an academic school of thought of discipline by the work of Ross Watts and Jerold Zimmerman (in 1978 and 1986). As researched by (Gaffinkin, 2007) cited in (Kothari, 2002) explains that, positive accounting theory involves the accounting implications of the concurrent theoretical developments in finance and economics. Watts and Zimmerman then tailored those theories to explain accounting phenomena. Much of PAT research has focussed on the motives of management in making accounting choices when markets are semi-strong and there are significant costs in drawing up and enforcing contracts as well as political costs …show more content…

This did not lead to the rejection of the no-effects hypothesis. Hence, it enabled the researchers to examine the assumptions of zero accounting cost which led to a breakthrough in accounting research. It has been known from the research that Accounting researchers have abandoned the assumption of zero transaction and information costs. This breakthrough showed a chance for explanation and prediction of variation of accounting practice across firms. According to (Kabir, 2010) cited in (Sunder, 1997), that the firm is a nexus of contracts, and accounting methods establish an integral part of this set of contracts. It has been observed that accounting can affect firm value via their impact on contracts. Therefore, Accounting is no longer ordinary form as was assumed under the EMH and CAPM regime. The dropping of the assumption of zero contracting costs has shown that accounting methods have the potential to affect the cash flow to the contracting parties. Thus it provides incentives to the contracting parties to influence accounting

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