Whittington; Accounting & Business Research, 1987.

Objective: By: examine the contribution of watts & Zimmerman review/ summarise each chapter Critique PAT methodology

Main arguments: Re W&Z: over denigrate prior theories / other approaches so not fully realise their potential to add to accounting choice studies ignore the narrow restrictions of their own works Re PAT: Because PAT explains & predicts, argued that it is scientific & good implies is is value free while normative / prescriptive theories are unscientific & bad o But PAT not value free choice of questions & descriptions of world involves decisions on what is important Eg assumes that CAPM & stock market impacts = measure of value of information Emphasise is on predictive ability not validity of assumptions. o But often the predictions are difficult to test as theories too narrow as lack a rich theory of firms and political processes Assumptions that models based on are Chicago school of economics eg: o Perfectly competitive equilibrium exists o Stock markets have no anomalies CAPM holds o Ignores costs to ill informed traders Assumes that private contracting is cheaper or better than government contracting o But if this is not clear why standard setters exist

Watts & Zimmerman Objective: Focus of paper:

Accounting Review

1978

to develop a theory of accounting standards costs and benefits of accounting standards to managers

Managers motivation: maximise own utility, resourceful and innovative Lobby in own self-interest +ve function of future compensation = wages, incentive pay, non-pecuniary benefits -ve function of variability future compensation

Accounting standards affect wealth via: Taxes: mainly indirect via chance that tax authorities use rule / change rules Regulations: especially rate setting for regulated industries Political costs: avoid high profit & congruent attention Info production costs Management compensation o incentive to adjust compensation to counteract change accg std high as impact on shareholder wealth and share prices o incentive for politicians / bureaucrats to adjust for changes in accg stds low as no direct wealth impacts only via votes so accg change more likely to affect taxes, regulations & pol costs than mant compensation. So: incentive to minimise income if regulated or high political costs incentive to maximise income otherwise

Lobby if: Benefits > costs Benefits more if large as more likely to affect prob of change of standard So: large firms lobby in favour of standard if reduce profits medium firms not lobby as political costs balance out compensation impacts small firms lobby against if reduce profits or no lobbying as costs>benefits of lobbying tested on: general price level changes USA only 53 cos generally support theory