Positive Accounting Theory: A Ten Year Perspective

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 paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in that 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.

Keywords: Positive theory, accounting, accounting choice, methodology

JEL Classification: M40, M41, M46, M49, L22

Suggested Citation

Watts, Ross L. and Zimmerman, Jerold L., Positive Accounting Theory: A Ten Year Perspective. Accounting Review, Vol. 65, 1990. Available at SSRN: https://ssrn.com/abstract=928701

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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