PERTEMUAN #13
EMB 914
2
Positive Accounting
Theory
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PAT Concept
Agency Theory Efficient Market Hypothesis
(EMH)
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Positive Accounting Theory
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Positive Accounting Theory
• Assumptions:
The accountants (and, in fact, all
individuals) are primarily motivated
by self-interest (tied to wealth
maximisation), and that the particular
accounting method selected (where
alternative are available).
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The Three Hypotheses
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The 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 period
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The Bonus Plan Hypothesis
• Because of the nature of of the accrual process,
this will tend to lower future reported earnings
and bonuses, other things equal.
• PV of manager’s utility from future bonus
stream will be increased by shifting earnings
toward the present
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The Debt Covenant Hypothesis
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The Debt Covenant Hypothesis
• Violation of debt covenant is costly
– Restriction on dividends
– Limit additional borrowing
– Issuance of stock, …
• Increase current earnings
Assets increase
To avoid violation
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The Political Cost Hypothesis
• All other things equal, the greater the
political costs (taxes, regulations) faced by
a firm, the more likely the manager is to
choose accounting procedures that defer
reported earnings from current to future
periods
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The Political Cost Hypothesis
• Large firm with high profit attracts media,
consumers, and politicians attention
– Large firm trend to reduce profit reports
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Criticisms
• Not improving accounting pratices
• Not value free
• Not positive thinking for humankind
• …
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PAT Concept
Agency Theory Efficient Market Hypothesis
(EMH)