Presentation of Research Area George Iatridis University of Thessaly – ΤΕΙ of Larissa

Positive Accounting Theory (PAT) PAT…is concerned with explaining accounting practice. It is designed to explain and predict which firms will and which firms will not use a particular method…but it says nothing as to which method a firm should use

PAT (cntd.) Focuses on relationships between various individuals and how accounting is used to assist in the functioning of these relationships examples of relationships: owners and managers managers and the firm’s debt providers

Key hypotheses Three key hypotheses frequently used in PAT literature to explain and predict support or opposition to an accounting method: bonus plan hypothesis debt hypothesis political cost hypothesis research assumes managers will act opportunistically when selecting methods

Bonus plan hypothesis Managers of firms with bonus plans are more likely to use accounting methods that increase current period reported income also called management compensation hypothesis action increases the present value of bonuses paid to management

Debt hypothesis The higher the firm’s debt/equity ratio, the more likely managers use accounting methods that increase income also called debt/equity hypothesis the higher the debt/equity ratio, the closer the firm is to the constraints in debt covenants covenant violation results in costs of technical default

Political cost hypothesis 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 reduction of reported income is hypothesised to reduce the possibility that people will argue that the organisation is exploiting other parties

Opportunistic perspective Seeks to explain managers’ actions once contracts are already in place not possible to write complete contracts, so managers are assumed to opportunistically act to maximise own wealth known as ex post perspective considers opportunistic actions after the fact

Stakeholder theory Two branches of Stakeholder theory: ethical (moral) or normative branch positive (managerial) branch many similarities between Legitimacy theory and Stakeholder theory should not be treated as two separate theories but two (overlapping) perspectives of the issue set within a ‘political economy’ framework

Ethical branch of Stakeholder theory All stakeholders have the right to be treated fairly by an organisation issues of stakeholder power are not directly relevant management should manage the organisation for the benefit of all stakeholders where interests conflict, business managed to attain optimal balance among them

Managerial branch of Stakeholder theory Attempts to explain when corporate management will be likely to consider the expectations of particular (powerful) stakeholders theories can be tested with empirical observation unlike normative ethical branch specifically considers the different stakeholder groups within society, and how they should be best managed not society as a whole like Legitimacy theory expectations of stakeholders considered to impact on operating and disclosure policies

Social accounting Addresses eco-justice issues social accounting refers to consideration of social-based issues for external reporting purposes helps to evaluate how well a firm is fulfilling its social contract

Eco-justice and Eco-efficiency reporting When considering environmental and social implications, eco-efficiency and eco-justice issues are considered

Eco-efficiency reporting Concerned with maximising the use of a given quantity of resources and minimising the environmental implications of using the resources relates to environmental protection

Eco-justice reporting Eco-justice reporting indicates how the entity is using its limited resources to ensure that disadvantaged groups are not forgotten includes information about creation of employment, education, health care, observance of human rights and equal opportunities, support for people in developing countries, etc.