Towards a Positive Theory of the Determination of Accounting Standards

Posted: 6 Sep 2006

See all articles by Ross L. Watts

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jerold L. Zimmerman

University of Rochester - Simon Business School

Abstract

This article provides the beginning of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards that are likely to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs and political costs, and they are combined into a model that predicts that large firms that experience reduced earnings due to changed accounting standards favor the change. All other firms oppose the change if the additional bookkeeping costs justify the cost of lobbying. This prediction was tested using the corporate submissions to the FASB's Discussion Memorandum on General Price Level Adjustments. The empirical results are consistent with the theory.

Keywords: Positive theory, accounting standards, political costs, lobbying

JEL Classification: M41, M44, H25, L50, J33

Suggested Citation

Watts, Ross L. and Zimmerman, Jerold L., Towards a Positive Theory of the Determination of Accounting Standards. Accounting Review, Vol. 53, 1978. Available at SSRN: https://ssrn.com/abstract=928684

Ross L. Watts (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States

Jerold L. Zimmerman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

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