Towards A Positive Theory of the Determination of Accounting Standards

This article provides the beginning of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards that are likely to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs and political costs, and they are combined into a model that predicts that large firms that experience reduced earnings due to changed accounting standards favor the change. All other firms oppose the change if the additional bookkeeping costs justify the cost of lobbying. This prediction was tested using the corporate submissions to the FASB's Discussion Memorandum on General Price Level Adjustments. The empirical results are consistent with the theory.