Positive Accounting Theory: A Ten Year Perspective Author(s): Ross L. Watts and Jerold L. Zimmerman Reviewed work(s): Source: The Accounting Review, Vol. 65, No. 1 (Jan., 1990), pp. 131-156 Published by: American Accounting Association Stable URL: http://www.jstor.org/stable/247880 . Accessed: 31/10/2011 02:22 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact firstname.lastname@example.org.
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THE ACCOUNTING REVIEW Vol. 65, No. 1 January 1990 pp. 131-156
Ross L. Watts and Jerold L. Zimmerman
University of Rochester
ABSTRACT: This paper reviews and critiques the positive accounting literature following publication of Watts and Zimmerman (1978, 1979). The 1978 paper helped generate the positive accounting literature which 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 the 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.
T is more than a decade since our two papers, "Towards a Positive Theory of the Determination of Accounting Standards" and "The Demand for and Supply of Accounting Theories: The Market for Excuses" were published in The Accounting Review. The intervening time allows us to look back on these papers and the ensuing literature with some perspective. The two papers were controversial ten years ago and remain so today. The papers (primarily Watts and Zimmerman 1978) contributed to a literature that has uncovered empirical regularities in accounting practice (Christie forthcom ing; Holthausen and Leftwich 1983; Leftwich forthcoming; Watts and Zimmer man 1986). The empirical regularities have been replicated in different settings I
Financial support was provided by the John M. Olin Foundation and the Bradley Policy Research Center at the University of Rochester. The comments of Ray Ball, James Brickley, Andrew Christie, Linda DeAngelo, Robert Hagerman, S. P. Kothari, Richard Leftwich, Tom Lys, Clifford Smith, Jerold Warner, and Greg Whittred are gratefully acknowledged. We thank William Kinney for encouraging us to pursue this project. An earlier version of this paper was presented at the Accounting Association of Australia and New Zealand, July 4, 1989, Melbourne, Australia. Manuscript received May 1989. Revision received September 1989. Accepted September 1989.
The Accounting Review, January 1990
(Christie forthcoming) and it is clear there is a relation between firms' accounting choice and other firm variables, such as leverage and size and the signs of the relations are mostly consistent across studies. Positive accounting research guided the search for the empirical regularities and provided explanations for them. To date, there are no systematic alternative sets of explanations...
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