| Accounting research |
|---|
 |
| Part of a series on Accounting |
Positive accounting is the branch of academic accounting research that seeks to explain and predict actual accounting practices. This contrasts with normative accounting, that seeks to derive and prescribe "optimal" accounting standards.
Positive accounting emerged with empirical studies that proliferated in accounting in the late 1960s. It was organized as an academic school of thought of discipline by the work of Ross Watts and Jerold Zimmerman (in 1978 and 1986) at the William E. Simon School of Business Administration at the University of Rochester, and by the founding of the Journal of Accounting and Economics in 1979. When published, the pioneering articles were greeted with considerable criticism.
Positive accounting can be associated with the contractual view of the firm. [1] [2] The firm is viewed as “a nexus of contracts” and accounting one tool to facilitate the formation and performance of contracts. Under this view, accounting practices evolve to mitigate contracting costs by establishing ex ante agreement among varying parties. For example, positive accounting postulates that conservatism in accounting –in this sense defined conditionally as requiring lower (higher) standards of verifiability to recognize losses (gains)– has origins in contract markets, including managerial compensation contracts and lender debt contracts. As an example, absent conservatism, managerial compensation agreements may reward managers based on current reports that later evidence indicates were unwarranted.
The contractual view of positive accounting puts it in tension with value relevance studies in accounting: the latter contend that accounting’s primary role is to value the firm, and thus practices like conservatism are sub-optimal. [3] The value relevance school emphasizes the usefulness of accounting information to equity investors in contrast to its usefulness in contracting exercises.
The efficiency perspective is taken into Positive Accounting theory as researchers explain how various managers choose accounting methods that show a true representation of the firm's performance. Within this perspective, [3] it is stated by numerous authors that accounting practices adopted by firms are often explained on the basis showing the true image of financial performance of the firm.
 | This section needs additional citations for verification .(June 2010) |
The opportunistic perspective holds the view that managers, who are agents to the principal, act to their self-interests. They only adopt accounting policies that allow them to gain, in the view that the firm also gains. Different types of hypotheses exist such as political cost, bonus plan and debt hypothesis that show what motives make the managers choose one accounting method over another.
The management compensation hypothesis states that managers who have accounting incentives, or remuneration that is tied up with the firm's accounting performance, will tend to manipulate accounting method and figures to show the accounting performance better than it should be. [3] For example, such managers may elect to use different depreciation method allowing lower profits at the start and higher profits towards the end. Older managers will tend to ignore any research and development costs because it will lower current year profits affecting their income.
The debt/equity hypothesis states that managers will tend to show better profits (similar to the bonus plan/management compensation hypothesis) with the intention of having a better performance and liquidity position to pay the interest and principal of the debt they have accumulated in the business. [3] The higher the debt/equity level the more likely it is that the managers will tend to use accounting methods and procedures in increasing accounting profit.
The political cost hypothesis asserts that firms will employ various accounting methods to show lower profits so as not to attract the attention of politicians, who have an eye on high-profit industries [3] and will place higher regulation on high-earning firms.
Finance is the study and discipline of money, currency and capital assets. It is related to and distinct from economics, which is the study of the production, distribution, and consumption of goods and services. Based on the scope of financial activities in financial systems, the discipline can be divided into personal, corporate, and public finance.
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. This could happen through direct absorption, a merger, a tender offer or a hostile takeover. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.
In finance, equity is an ownership interest in property that may be offset by debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a car worth $24,000 and owes $10,000 on the loan used to buy the car, the difference of $14,000 is equity. Equity can apply to a single asset, such as a car or house, or to an entire business. A business that needs to start up or expand its operations can sell its equity in order to raise cash that does not have to be repaid on a set schedule.
Financial statements are formal records of the financial activities and position of a business, person, or other entity.
Corporate governance are mechanisms, processes and relations by which corporations are controlled and operated ("governed").
Managerial economics is a branch of economics involving the application of economic methods in the organizational decision-making process. Economics is the study of the production, distribution, and consumption of goods and services. Managerial economics involves the use of economic theories and principles to make decisions regarding the allocation of scarce resources. It guides managers in making decisions relating to the company's customers, competitors, suppliers, and internal operations.
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity takes actions on behalf of another person or entity. The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt, and preferred stock, and is detailed in the company's balance sheet. The larger the debt component is in relation to the other sources of capital, the greater financial leverage the firm is said to have. Too much debt can increase the risk of the company and reduce its financial flexibility, which at some point creates concern among investors and results in a greater cost of capital. Company management is responsible for establishing a capital structure for the corporation that makes optimal use of financial leverage and holds the cost of capital as low as possible.
Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value".
An agency cost is an economic concept that refers to the costs associated with the relationship between a "principal", and an "agent". The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives and the agent generally has more information. The principal cannot directly ensure that its agent is always acting in its best interests. This potential divergence in interests is what gives rise to agency costs.
In management, business value is an informal term that includes all forms of value that determine the health and well-being of the firm in the long run. Business value expands concept of value of the firm beyond economic value to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms. According to the Project Management Institute, business value is the "net quantifiable benefit derived from a business endeavor that may be tangible, intangible, or both."
Capital budgeting in corporate finance, corporate planning and accounting is an area of capital management that concerns the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structures. It is the process of allocating resources for major capital, or investment, expenditures. An underlying goal, consistent with the overall approach in corporate finance, is to increase the value of the firm to the shareholders.
Michael Cole Jensen was an American economist who worked in the area of financial economics. Between 2000 and 2009 he worked for the Monitor Company Group, a strategy-consulting firm which became "Monitor Deloitte" in 2013. Until 2000, he held the position of Jesse Isidor Straus Professor of Business Administration at Harvard University.
Hyman Philip Minsky was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research attempted to provide an understanding and explanation of the characteristics of financial crises, which he attributed to swings in a potentially fragile financial system. Minsky is sometimes described as a post-Keynesian economist because, in the Keynesian tradition, he supported some government intervention in financial markets, opposed some of the financial deregulation of the 1980s, stressed the importance of the Federal Reserve as a lender of last resort and argued against the over-accumulation of private debt in the financial markets.
In corporate finance, the pecking order theory postulates that the cost of financing increases with asymmetric information.
The following outline is provided as an overview of and topical guide to finance:
Business economics is a field in applied economics which uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labour, capital and product markets. A professional focus of the journal Business Economics has been expressed as providing "practical information for people who apply economics in their jobs."
Management is a type of labor with a special role of coordinating the activities of inputs and carrying out the contracts agreed among inputs, all of which can be characterized as "decision making". Managers usually face disciplinary forces by making themselves irreplaceable in a way that the company would lose without them. A manager has an incentive to invest the firm's resources in assets whose value is higher under him than under the best alternative manager, even when such investments are not value-maximizing.
A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Corporate finance is the area of finance that deals with the sources of funding, and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value.