Watts & Zimmerman's Positive Accounting Theory

Watts & Zimmerman's Positive Accounting Theory

1. attempts to Describe and Predict: How people behave

   • So claims to be a Scientific Approach
     • So emphasises Empirical Testing

2. views an organization as a Nexus of Contracts

   • between Senior Managers (directors who approve FS) and
     • Shareholders
       • (Agency Theory) relationship governed by
         • Contract, including profit based bonus scheme
           • leading to Hypothesis 1: Bonus Plan (Healy Study, 1985)
     • Debtholders
       • relationship governed by
         • Debt Covenant
           • leading to Hypothesis 2: Debt Covenant (Sweeny Study, 1994)
     • Politicans, Media, etc.
       • relationship influenced by
         • Informal Contract
           • leading to Hypothesis 3: Political Costs (Jones Study)
     • who can behave Opportunistically
     • who determine Financial Statement Variables (e.g. Profit Figure)
       • by using Generally Accepted Accounting Principles, which provide a Restricted Choice

3. makes no attempt to Guide (which is Normative Theory)