Definition of PAT:
Watts and Zimmerman (1986) defined Pat as a theory that seeks to explain and predicts particular phenomenon. It is concerned with explaining accounting practice. The three basic hypotheses as outlined by Watts and Zimmerman (1978) underlying PAT are:
1. Bonus plan hypothesis:
The bonus plan hypothesis is that managers of firms with bonus plans are more likely to use accounting methods that increase current period reported income. Such selection presumably increase the present value of bonuses if the compensation committee of the board of directors does not adjust to the method chosen
2. Debt/equity hypothesis:
The debt/equity hypothesis predicts that the higher the firm’s debt/equity ratio, the more likely that the managers use accounting methods that increase income.
3. political cost hypothesis:
The political cost hypothesis predicts that large firms rather than small firms are more
likely to use accounting choices that reduce reported profits. Size is a proxy variable for political attention.
THE NATURE OF POSITIVE ACCOUNTING THEORY VS. NORMATIVEACCOUNTING THEORY:
1. POSITIVE ACCOUNTING THEORY
The basic idea of positive accounting theory (PAT) is adopted from the Pop Suwaldiman 48 SINERGI Vol. 6 No. 1, 2003 per idea about what is theory in science (Boland & Gordon, 1982, p. 145). The function of theory is to explain and predict about a field or phenomena that is being observed. Therefore a theory is descriptive and explanative but not normative. The theory is not to conduct nor drive the phenomena to be in such a way. A theory is long life true since there is not a new theory that proves or refutes that the old theory is fail, so that, a theory cannot be proved as a truth but it is possible to be proved as a false (refutable). Furthermore, the function of a theory is to answer what is and why not what should be nor how to do.
Positive accounting theory... [continues]
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