Account Theory

Positive theory: theories that describe, explain or predict what is happening in the world (eg a/c practice/world) (Drever et al. 2007)

Normative theory: theories that make suggestions/ recommendations as to what should happen or what ought to be done – prescribing. Aim at achieving some goal or objective. (Drever et al. 2007)

Prior 1970 – accounting research focus on the normative approach, prescribing from a/c best practices

After 1970 – accounting research focus on developing theories base on a system use of empirical evidence (from experiment, practice). Instead of developing a theory base on past and current financial information and industry and macroeconomics data. Thus having a predictive value

* Made possible by technology large financial date base was made available with sophisticated statistical techniques

1.

Efficient market hypothesis (EMH) a market in which all share prices reflect fully all the available information so that investors cannot make excessive returns by exploiting information.

* A significant research have failed to support EMH and for a theory to be establish, hypothesis require evidence and support. EMH (and capital market research) was derived from the economic and finance discipline and as a consequence of several failures to support EMH, it is only a hypothesis. A theory is provides an explanation of what is happening and help us (account, investors/ capital market participants & preparers of f/reports) predict what could happen.

* Thus it is primarily base on a set of hypothesis. A hypothesis is a tentative assumption of prediction of a theory. Within the accounting profession, we adopt EMH to help us understand and make sense if, and if yes to what extent, do our accounting information provide relevance for decision making for all stakeholders.

* Also the concepts and studies of price lead earnings and post-earnings announcement drift strongly contradict

Within my opinion, I don’t believe that...