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Positive Accounting Theory Essay

273 words - 2 pages

Positive Accounting Theory:
A Ten Year Perspective
Ross L. Watts and Jerold L. Zimmerman
University of Rochester
ABSTRACT: This paper reviews and critiques the positive accounting literature
following publication of Watts and Zimmerman (1978, 1979). The
1978 paper helped generate the positive accounting literature which offers
an explanation of accounting practice, suggests the importance of contracting
costs, and has led to the discovery of some ...view middle of the document...

This paper attempts to remove some
common misconceptions about methodology that surfaced in the debate. It
also suggests ways to improve positive research in accounting choice. The
most important of these improvements is tighter links between the theory
and the empirical tests. A second suggested improvement is the development
of models that recognize the endogeneity among the variables in the
regressions. A third improvement is reduction in measurement errors in
both the dependent and independent variables in the regressions.
I T is more than a decade since our two papers, "Towards a Positive Theory of
the Determination of Accounting Standards" and "The Demand for and
Supply of Accounting Theories: The Market for Excuses" were published in
The Accounting Review. The intervening time allows us to look back on these
papers and the ensuing literature with some perspective.
The two papers were controversial ten years ago and remain so today. The
papers (primarily Watts and Zimmerman 1978) contributed to a literature that
has uncovered empirical regularities in accounting practice (Christie forthcom
ing; Holthausen and Leftwich 1983; Leftwich forthcoming; Watts and Zimmer
man 1986). The empirical regularities have been replicated in different settings

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