An income strategy approach to the positive theory of accounting standard setting/choice

Abstract This paper is designed to provide additional evidence on the positive theory of accounting policy choice by combining individual accounting principles into firm income strategies. These strategies were the dependent variable in a probit analysis where the independent variables were size, management compensation, industry concentration ratio, systematic risk, capital intensity and the total debt to total asset ratio. The results indicate that four of these factors (size, management compensation, concentration ratio, and the total debt to total asset ratio) have a significant association with the choice of a firm's income strategy. This test provides strong evidence consistent with the positive theory of accounting standard setting/choice. We also present evidence that smaller firms and/or firms in less concentrated industries do not appear to make accounting policy choice decisions that are consistent with this theory.

[1]  Nicholas J. Gonedes,et al.  Disclosure Rules, Information-Production, and Capital Market Equilibrium: The Case of Forecast Disclosure Rules , 1976 .

[2]  Ross L. Watts,et al.  SOME TIME SERIES PROPERTIES OF ACCOUNTING INCOME , 1972 .

[3]  RonenJoshua,et al.  Do Corporations Use Their Discretion in Classifying Accounting Items to Smooth Reported Income , 1975 .

[4]  Robert W. Holthausen.  Evidence on the effect of bond covenants and management compensation contracts on the choice of accounting techniques: The case of the depreciation switch-back , 1981 .

[5]  DavidsonSidney,et al.  Inflation Accounting: Public Utilities , 1975 .

[6]  Emmett Daniel Smith,et al.  The effect of the separation of ownership from control on accounting policy decisions , 1974 .

[7]  S. Penman,et al.  Accounting Changes and Stock Prices: An Examination of Selected Uncontrolled Variables , 1976 .

[8]  Gary E. White.  Discretionary Accounting Decisions and Income Normalization , 1970 .

[9]  R. Kaplan,et al.  Investor Evaluation of Accounting Information: Some Empirical Evidence , 1972 .

[10]  R. Leftwich.  Private determination of accounting methods in corporate bond indentures , 1980 .

[11]  R. Ball.  Changes In Accounting Techniques And Stock Prices , 1972 .

[12]  M. Zmijewski,et al.  Some economic determinants of accounting policy choice , 1979 .

[13]  Douglas A. Wolfe,et al.  Nonparametric Statistical Methods , 1973 .

[14]  D. Collins,et al.  The Economic Determinants of the Market Reaction to Proposed Mandatory Accounting Changes in the Oil and Gas Industry , 1981 .

[15]  B. E. Cushing.  An Empirical Study of Changes in Accounting Policy , 1969 .

[16]  R. L. Weil,et al.  Inflation Accounting: What Will General Price Level Adjusted Income Statements Show? , 1975 .

[17]  J. C. Mckeown,et al.  Understanding Accounting Changes in an Efficient Market: Evidence of Differential Reaction , 1977 .

[18]  A. Alchian,et al.  Redistribution of Wealth through Inflation: Contrary to the generally accepted view, business firms do not necessarily gain through inflation. , 1959, Science.

[19]  R. Hagerman,et al.  A Test of Accounting Bias and Market Structure , 1976 .

[20]  R. McKelvey,et al.  A statistical model for the analysis of ordinal level dependent variables , 1975 .