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

Presentation of Research Area George Iatridis University of Thessaly – ΤΕΙ of Larissa. Positive Accounting Theory (PAT).

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

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  1. Presentation of Research AreaGeorge IatridisUniversity of Thessaly – ΤΕΙ of Larissa

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

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

  14. 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

  15. 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.

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