Positive accounting theory: a ten year perspective

Article Abstract:

In the ten years since Watts and Zimmerman published papers on positive accounting theory, a positive accounting literature has developed that: attempts to explain accounting practice and the importance of contracting costs, has discovered empirical regularities, and has led to an un-productive methodological debate. Positive accounting theorists must establish more stringent links between empirical tests and theory, create a model that recognizes endogeneity among regression variables, and reduce measurement errors in the dependent and independent variables in the regressions. Breakthroughs in positive accounting theory will result from viewing accounting as a choice separate from organization choice, contracting, and financial structures.

Watts, Ross L., Zimmerman, Jerold L.

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Income smoothing and incentives: empirical tests using accounting changes

Article Abstract:

T-tests and regression analysis reveal that income smoothing is associated with company size, the existence of bonus compensation plans, and the divergence of actual income from income expectations. Findings also indicate that smoothing by means of accounting changes is associated with the effect of the accounting change on earnings level. Findings are consistent with management recognizing and making trade-offs between the impact of accounting selections on both income levels and income variability.

Methods, Accounting and auditing, Corporation reports, Company reports, Income accounting, Smoothing (Statistics)

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