"Positive Theory, Rationality and Accounting Regulation" Summary

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Kaplan, Steven E. and Ruland, Robert G., “Positive Theory, Rationality and Accounting Regulation” Critical Perspectives on Accounting, (1991). Existing agency theory fails as a positive theory since it does not provide theory of accounting regulatory development. Watts & Zimmerman are inconsistent w/ positive theory, since they evaluate rather than predict theories. If W&Z wish to argue normatively, they should not do so under the guise of positive theory. Failure of agency theory to provide a prediction of accounting regulatory development stems from its reliance on a rationality assumption which is both too narrow and too broad. Richer theories relying on either better specified rationality assumptions or broader views of organizational behavior are needed to predict and explain the development of accounting regulatory structures. A confluence of theories will provide the richest description. * Securities Act of 1933 and Securities Exchange Act of 1934 mandate disclosure and auditing of financial accounting information. * Financial statement disclosure has been expanding * Mandated information disclosure justified b/c it minimizes or reduces a “market failure” to provide information voluntarily. W&Z suggest regulation is a response to market failures associated w/ private production of information. They conclude that market failure arguments are fallacious and disclosure regulation may not achieve a social optimum. In general, they’re arguments are against accounting regulation. Purpose: To review critically anti-regulation arguments and their link to positive accounting theory. The useful & ideological qualities of the “positive theories” championed by W&Z which concern regulatory development in accounting. As well, richer theories are suggested to describe regulatory development in accounting. * This

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