Accounting Theory: Reseach Article Analysis

Introduction

The article tells about the ten-year perspective on the positive accounting framework. Like it suggests the importance of contracting costs that arises from market transactions like selling new debts, equity’s legal costs or underwriting costs, an internal transaction of the company, and transaction which is done on political purposes. In article contracting cost is used in broad terms which replaces the term agency costs. Moreover, this article tries to explain and predict accounting practice by the discovery of previously unknown empirical regulations. In the article, the author tries to develop and improve the models in which the other variables could change an important variable in the regressors. Thirdly, in the article author tries to reduce measurement errors in both the dependent and independent variables in the model. 

Research methodology and methods

The research in this article is based on previous accounting practices and information given in the article is endorsed from past research work conducted on “positive accounting theory”. The research also based on various hypotheses such as bonus plans hypothesis, debt-equity hypothesis, and political cost hypothesis. 

The author’s methodology in the article is that they try to predict the position of the companies based on voluntary disclosure which they published whenever they are affected by the new accounting standards. The authors try to refer to some studies from Davidson and Weil (1975) and Davidson, Stickney, and Weil (1976) where they used modified procedures that only contain the published financial statements and GNP deflators. 

Research method issues

There had been 2 issues in research methods which are reduction of test’s power and there is a possibility that some results are not stated by a hypothesis which are obtained in the positive accounting literature and its due to unknown alternative hypotheses.

The first issue named “reduction of test ‘power was due to problems in the four areas which are model specification, left-hand-side variable, right-hand side variable, and omitted variables.

There had been two errors in model specifications. The first error was that in regression the accounting method depends on the effect of the choice on the wealth of the manager. The explanatory variables which explain the wealth effects were compensation plans, debt agreements, and the political environment. The compensation plans variable interpreted as manger’s opportunism while the political environment interpreted both manager’s efficiency and opportunisms, so model is misspecified. The second error was the omission of the interaction impact among the right-hand variables.