Compare and Contrast Capital Market

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Contrast to Capital market research and Behaviour research
Positive theories explain and predict the behaviour of users of accounting information: i)Reactions of investors to accounting information ii)Association between accounting numbers and share prices
Capital market research and Behaviour research both positive theories.
Research question: Capital market research investigates the impact of accounting information (especially earnings) on share prices. It is concerns with investor reactions to accounting information. Behaviour research explains how to use and process the accounting information.
Objective: The main objective of capital market research is to examine relationship between accounting information and share prices. Behaviour
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ii) Opportunistic perspective-three hypotheses, to increase managerial compensation: Bonus plan hypothesis: Managers of firms with bonus plans are more likely to use accounting methods that increase current period reported income;
Debt hypothesis: The higher the firm’s debt/equity ratio, the more likely managers use accounting methods that increase income;
Political cost hypothesis: Large firms rather than small firms are more likely to use accounting choices that reduce reported profits.

Based on ‘scientific’ research. Large samples, statistics, hypothesis testing; aim = universal truth claims.
Rational utility maximising individuals.
Makes universal claims – ignores social context
Focuses on relationships between various individuals and how accounting is used to assist in the functioning of these relationships.
Origins of PAT – Agency Theory: i) Explains why the selection of particular accounting methods might matter; ii) Focus on the relationships between principals and agents.

2. Criticisms of PAT
i) Only addresses relationship between managers and financial stakeholders (shareholders & debtholders) ii)Non-financial stakeholders are excluded as users of accounting info iii)Problem with rationality and utility maximisation
PAT is not value-free as it asserts: Based on normative explanations of human behaviour -managers are rational,
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