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Positive Accounting Theory (PAT)

Positive accounting theory - Watts & zimmerman's PAT …

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Efficient Contracting
The Relationship Between EMH and Economic Consequences
Existence of Economic consequences reinforce that security markets are
not fully efficient
Inconsistent observations lead to
Positive Accounting Theory (PAT)
Positive Accounting Theory (PAT)
Positive Theory
A theory to predict managers' accounting policy choices

A good prediction of real world events
Normative Theory
A theory that prescribes how people should behave in order to accomplish a given objective.

Start studying Positive accounting theory - Watts & zimmerman's PAT ..

Positive accounting theory is one of the basic financial accounting theories. This theory seeks to explain and predict accounting practice of the company. positive accounting theory include three mainstreams of empirical research: 1) three hypotheses (the bonus plan hypothesis, the financial leverage hypothesis and the size hypothesis) explaining accounting policy choice by the managers are tested; 2) earnings manipulation (earnings management, income smoothing, ‘taking the bath’) and creative accounting are analyzed; and 3) the reaction of capital market to reported accounting numbers and changes of policy methods are researched. Positive accounting theory is considered as a good economic theory, but it is criticized by some authors. Positive accounting theory do not gives prescriptions for accounting practice, it does not say something about good or bad accounting policy of the company. researchers do not take into account relations between managers and accountants in the companies in their empirical investigations. Hypotheses of positive accounting theory and results of many investigations are based on the accounting policy of large politically sensitive (for example, oil and gas) companies in well-developed countries, but results of hypotheses’ testing may differ analyzing accounting policy choices of small companies in the middle economy countries. Despite critics positive accounting theory stays mostly grounded accounting research paradigm during last decades.

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8.1 Outline of Positive Accounting Theory - DocsBay



How people should react in real world situation.
Types of Accounting Theories
Positive Accounting Theory (PAT)
This Theory attempts...
1.

Hence, entities which need to report higher amounts in these areas would consider adoption of the revaluation model.


- large firms may seek to choose methods to reduce reported profits

- the incentives for entities to adopt fair value measures, then, tend to be entity-specific because of pressures placed on the entities relating to external circumstances

For example: an entity’s reported profit figure may be under scrutiny from a specific source, such as a trade union seeking reasons to support claims for higher pay, or regulators looking at monopoly control within an industry.
Political Costs Hypothesis - concept of full disclosures

- reporting risk

- information asymmetry Perspectives of Positive Accounting Theory 1.

8.1 Outline of Positive Accounting Theory ..

ü These three hypotheses form an important component of positive accounting theory

You are close to violating this agreement.

What accounting policies do you choose in order to avoid penalties?
Agenda
Introduction/ overview
The Concept Of Economic Consequences
Relationship between EMH and Economic Consequences
Positive Accounting Theory (PAT)
Efficient Contract Approach
Opportunistic Approach
Three Hypotheses of PAT
Efficient Contract vs Opportunistic Approach
Criticisms of PAT
Your company has been experiencing high growth in earnings and increasing media coverage.

You are worried you will be subject to government scrutiny.

What accounting policies should you choose in order to decrease the possibility of new regulatory requirements?
Concept of Economic Consequences
What are Economic Consequences
ANSWERS
Criticisms on (PAT)
Economics Consequences
Shift future earnings to current periods

Higher Bonus

Disregard negative effects on company
ANSWERS
A concept that asserts that, despite the implications of efficient market hypothesis (EMH), accounting policy choice can affect firm value.

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