ACCO 340 Lecture 6: Three Hypotheses of Positive Accounting Theory
2 Feb 2017
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Three hypotheses of positive accounting theory: bonus plan hypothesis: all other things being equal, managers of firms with bonus plans are more likely to choose accounting procedures that shift reported earnings from future periods to the current periods. For example, political costs can be imposed on high profitability, which may attract media and consumer attention. We would expect that managers of firms with bonus plans would oppose proposed accounting standards that may lower reported net income, such as expensing esos (there was a lot of people against it). In other words, pat assume that managers choose accounting policies to maximize their own expected utility relative to their given remuneration and debt contracts. Pat attempts to understand and predict firms" accounting policy choices. At its most general level, it asserts that accounting policy choice is part of the firm"s overall need to minimize its cost of capital and other contracting costs.
