Towards a Positive Theory of the Determination of Accounting Standards



Synopsis2

Introduction2

Discussion3

Summary of the Article3

Research Paradigm3

Research Question (Hypothesis)4

First (Political cost hypothesis)4

Second (debt to equity hypotheses)5

Third (Bonus plan hypothesis)5

Theoretical Framework5

First (Utility maximization)5

Second (incentive element)6

Criticism7

Limitation8

Methodology9

Research Findings9

Conclusion10



Towards a Positive Theory of the Determination of Accounting Standards

Synopsis

In this paper Watss and Zimmerman have explored the importance of positive accounting theories. They highlighted the factors that encourage the managers and agents in lobbying on the standards of accounting. According to them manager's opinion are associated with the size of the company. They collected data for their research from FASB's discussion memo on general price level adjustment. Results of their research are entirely dependent upon the corporate submission to the FASB.

Introduction

To address the issue of accounting standards, Watts and Zimmerman have presented a notable research paper in the field of accounting and reporting. Their research also addresses the point whether the nature and size of a firm affect its view on certain accounting standards. This research paper has played a very critical role in the development of positive accounting theory. This research is considered as the first research that attempts to provide empirical evidences on the theory of positive accounting. Points which Watts and Zimmerman raised in their research were new at that time. Researchers consider this work as a building block for recognition irregularities in the accounting practices (standards). This research paper initiated a constructive debate among accounting professionals and researchers (Watts & Zimmerman, 1978, 112-134).

This essay provides a detailed analysis of the give research paper. Work of Watts and Zimmerman is evaluated in six different parts; 1) summary 2) research paradigm 3) research question (hypothesis) 4) theoretical framework 5) significance of the research 6) limitation of the research.

Discussion

Summary of the Article

This paper of Watts and Zimmerman has contributed a lot in the field of accounting and reporting. In this paper researchers have identified some critical points behind the selection of accounting standards in a company. They have highlighted certain factors that cause managers of a company to opt for specific accounting standards. Watts and Zimmerman in 1978 assumed that there is a direct relationship between the cash flow and share price, and the share price of a firm is directly dependent upon its cash flow rather than on its accounting income (Hines, 1988, Pp. 657-662). In addition to this, authors have also discussed and analysed the concepts of political cost, agency theory and contracting cost theory.

Research Paradigm

Research paradigm plays a role of foundation in every type of research. Research paradigm indicates the way a research would be conducted, and it also guides about the research techniques and methods. Zimmerman and Watts have discussed an interactive and vulnerable topic related to the accounting theory. In this paper, researchers have discussed positive paradigms. Their concept of positivism is criticized by various researchers. This criticism is based on five main arguments; 1) it is not possible to disconnect individuals from the social framework in which they ...