The response of positive researcher

The response of positive researchers to the failure of early studies to discriminate between the

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Positive Accounting Theory and Science


competing hypotheses – the no-effects hypothesis and the mechanistic hypothesis – illustrates the attitude of positive researchers towards data and theory. The failure of early studies to discriminate between the competing hypotheses did not lead them to reject the EMH. This is because tests of the no-effects hypothesis are tests of the joint hypotheses of EMH, CAPM, and zero contracting costs (Watts & Zimmerman, 1986, p. 74). The failure might be due to the empirical non-descriptiveness of any one assumption – EMH, CAPM, or zero transaction cost. As noted earlier, instead of rejecting the EMH and CAPM, researchers started to raise questions about the descriptive validity of zero transaction costs and finally dropped the assumption. This suggests that positive researchers do not regard empirical evidence at a point in time as the final arbiter of a theory. Both data and theory have influence over each other. Complex value judgments enter the process of theory evaluation.

Dropping the zero contracting cost assumption, in fact, led Mouck (1990, pp. 236-237) to consider PAT as resembling the Lakatosian research program. The validity of this argument is suspect, because the dropping of the zero contracting costs assumption led to the emergence of a research program distinct from capital market-based accounting research. The new line is the research in accounting choices. It is true that dropping the zero contracting costs assumption enables positive researchers to explain accounting choices. The two research programs, however, address different issues. The new research programs address different questions, let alone explain the success of the capital market-based accounting research program. This developmental pattern does not fit the Lakatosian program, because, according to this program, adjustments are made in the protective belt to accommodate new facts (Lakatos, 1970, pp.133-37). After adjustment, the Lakatosian research program continues to explain the unrefuted content of the earlier version of the theory.

Choice of Theory

Watts and Zimmerman’s (1990, p. 140) position that a theory be abandoned when an alternative theory with greater explanatory power emerges indicated that the competition between rival theories could be decided rationally. The theory with greater explanatory power is selected. This indicates that PAT researchers consider knowledge cumulative in nature. Popper (1970, pp. 56-57) subscribed to this idea. He believed that a critical comparison between competing frameworks was always possible. On the other hand, Kuhn suggested that rival paradigms are incommensurable. Thus the debate over rival paradigms cannot be settled by logic or experiments alone (Kuhn, 1996, pp. 148-150). Persuasion is used to convert the supporters of the old paradigm to the new one (Kuhn, 1996, p. 154). One of the most important features of Kuhn’s account of science is that science is not cumulative in nature. This contrasts with the PAT researchers’ position.

The problem with the above position of PAT on theory choice is that probably no theory with greater explanatory power emerges all of a sudden. The explanatory power that PAT now has is the result of four decades of research efforts. Thus, if the relative explanatory power of competing theories is to be made the arbiter in theory choice, that has to be applied not at the initial stages but at some later stages. So, three relevant methodological questions are (a) how to decide rationally whether to give chance to a new theory or allow it to die away in its infancy, (b) at what stage of theory development the relative explanatory power criterion is to be applied, and (c) how to choose between two theories when the new theory explains some aspects of the old theory and some new phenomena not explained by the old one. The two diagrams in Figure 1 illustrate the third situation. Doubtless to say, a rational decision is much easier to take in Situation A than in Situation B.

Situation B can be illustrated with the help of the legitimacy theory and the stakeholder theory. These theories have been used to explain social and environmental disclosures by an entity (Deegan,
2007). The political cost hypothesis can also be used to explain social and environmental disclosures. For example, using the agency theory framework, Ness and Mirza (1991) found a positive association between environmental disclosures in annual reports of large UK companies and the oil industry. Thus, the legitimacy theory and the stakeholder theory may be considered competing theories of PAT. However, no theory explains fully the phenomena explained by the other theory. Furthermore, as Deegan (2007) notes, the theories in question are based on different assumptions. Thus, the relative explanatory power cannot be used to choose from among these theories at this stage.