Bonus plan hypothesis

Watts and Zimmerman reviewed the theory and methodology of the economic-based literature in accounting in their prominent book dated [ 6 ].

Positive accounting theory ppt

Older managers will tend to ignore any research and development costs because it will lower current year profits affecting their income. Numerous empirical studies tested its hypotheses, provided important evidence, and contributed to the theory. Watts and Zimmerman [ 17 ] This paper analyses; The demands for accounting theories in an unregulated economy than in a regulated economy, i. Criticisms[ edit ] It does not provide any prescription, it does not state what ought to happen, rather explains and predicts what would happen, which is the aim of positive accounting theory and this is insufficient It is not value-free because it only explains and predicts what people might do, ignoring altogether on what they should do. As far as political costs hypothesis is concerned, it is assumed that if managers are under political scrutiny, they are likely to adopt accounting methods that reduce reported income [ 4 ]. Political cost hypothesis[ edit ] The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries. Authors Contribution Watts and Zimmerman [ 16 ] This pioneering article outlined many of the problems posed by regulatory capture. Authors Ball, Kothari and Watts [ 20 ] Determinants of the relationship between earnings changes and stock return. Choices are not made in terms of "better measurement" of some accounting construct, such as earnings. These are forecasting earnings, contracting process, compensation plans, debt contracts, political process, empirical tests of accounting choice, stock price tests of the theory, and the theory's application to auditing. Management compensation hypothesis Bonus plan hypothesis [ edit ] The management compensation hypothesis states that managers who have accounting incentives, or their remuneration that is tied up with the firm's accounting performance will tend to manipulate accounting method and figures to show the accounting performance better than it should be. They explain the methodology of the empirical studies in the development of the literature.

These are forecasting earnings, contracting process, compensation plans, debt contracts, political process, empirical tests of accounting choice, stock price tests of the theory, and the theory's application to auditing. Older managers will tend to ignore any research and development costs because it will lower current year profits affecting their income.

They believe that management plays a central role in the determination of standards.

Bonus plan hypothesis

Criticisms[ edit ] It does not provide any prescription, it does not state what ought to happen, rather explains and predicts what would happen, which is the aim of positive accounting theory and this is insufficient It is not value-free because it only explains and predicts what people might do, ignoring altogether on what they should do. Learn how and when to remove this template message The opportunistic perspective holds the view that managers, who are agents to the principal, act to their self-interests. Political cost hypothesis[ edit ] The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries. The methodology of this literature is the methodology of economics, finance, and science generally [ 5 ]. They only adopt accounting policies that allow them to gain, in the view that the firm also gains. Major works of Watts and Zimmerman. PAT literature focuses on management's motives for financial reporting choices, using economic models and statistical processing, when there are agency costs and information asymmetry. Opportunistic and efficiency perspectives of PAT are distinguished.

A wide range of the literature incorporates both ex ante contracting efficiency incentives with ex post redistributive effects. Watts and Zimmerman identified three essential hypotheses. In this book written and used for second year M.

Normative accounting theory

Older managers will tend to ignore any research and development costs because it will lower current year profits affecting their income. Watts and Zimmerman [ 5 ] This paper examines and evaluated the evolution and state of PAT and criticisms of positive accounting research. The authors responded to most of the published critiques on issues relating to research method and philosophy of science. Beaver [ 2 ] The author examined the variability of stock returns and trading volume around earnings announcements. The development of positive accounting theory In this section, we examine the development of the PAT, the contribution of major works of Watts and Zimmerman, and the hypotheses of this theory. Academic literatures that were the impetus for PAT. Authors review the theory and methodology of the economic-based literature in accounting. A and Ph. In this book written and used for second year M. They explain the methodology of the empirical studies in the development of the literature. They also provide analyses end syntheses on forecasting earnings, contracting process, compensation plans, debt contracts, political process, empirical tests of accounting choice, stock price tests of the theory, and the theory's application to auditing [ 6 ]. Ball and Brown [ 1 ] They found significantly positive correlation between the sign of the abnormal stock return and the sign of the earnings change over the firm's previous year's earnings. Watts and Zimmerman identified three essential hypotheses. Choices are not made in terms of "better measurement" of some accounting construct, such as earnings.

Allowing lower profits steers away any attention by the public and the eyes of the government [3] who will place higher regulation on high earning firms. Jensen and Merckling [ 14 ] The authors investigated managerial behaviour, agency costs, and ownership structure in the context of the firm.

Authors Contribution Watts and Zimmerman [ 16 ] This pioneering article outlined many of the problems posed by regulatory capture.

debt covenant

The contracts are produced with the aim of guarantee that all parties, acting in their own self-interest, are at the same time motivated towards maximizing the firm's value. Different types of hypothesis exist such as political cost, bonus plan and debt hypothesis that show what motives make the managers choose one accounting method over another.

Opportunistic and efficiency perspectives of PAT are distinguished. Numerous empirical studies tested its hypotheses, provided important evidence, and contributed to the theory.

He found that the flow of info increase in the earnings announcement periods.

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Bonus Plan Hypothesis