By: Sutrisno Universitas Brawijaya Grahita Chandrarin

Universitas Merdeka Malang

INTERRELATIONSHIP BETWEEN FINANCIAL ACCOUNTING THEORY AND EMPIRICAL

RESEARCH

Accounting has been an academic discipline in colleges and universities for more than 100 years.

One of the characteristic associated with the an academic discipline is the publication of the ideas it generation in journal of accounting (AR, JAR, JAE, JBFA, AOS, etc.).

In this study we discuss the scientific method and how it relates to Financial Accounting Theory and Empirical Research.

FINANCIAL ACCOUNTING THEORY

FINANCIAL ACCOUNTING THEORY

Theories can be extremely useful because the attempt to explain relationships or predict phenomena.

What is a theory?1. Theory is the coherent set of hypothetical,

conceptual and pragmatic principles, forming the general framework of reference for a field of inquiry (Hendriksen).

2. Theories are composed of words or other symbols, they are statements, and do not have a physical form.

THE RELATIONSHIP WITH ACCOUNTING RESEARCH

• Accounting Research is the process of investigating phenomena, affecting the rules, definitions, concept, and principles of accounting.

• Formally developed theories that have been derived from the research process.

CONSTRUCTION OF ACCOUNTING THEORY

THEORY FORMULATION

THEORY VERIFICA

TION

INDUCTIVE (POSITIVE)

REASONING

DEDUCTIVE (NORMATIVE) REASONING

LOGICAL

EMPIRICAL

ACCOUNTING THEORY

INDUCTIVE-DEDUCTIVE CYCLE

1. Identify Research Problem

8. Asses Limitation and

Constrains

7. Evaluate 6. Analyses

5. Observe

Observation/Empirical

2. Develop Theoretical Framework

3. State Hypothesis

4. Construct Research Design

Theory Deductive

POSITIVE ACCOUNTING THEORY

Agency Theory

Efficient Market Hypothesis (EMH)

Positive Accounting Theory (PAT)

Bonus Plan Hypothesis

Political Cost Hypothesi

s

DebtCovenantHypothesis

Accounting Standards and Practices

Normative Theory

PRINCIPAL-AGENT THEORY

Asymmetric InformationPrincipal Agent

Adverse Selection

Moral HazardRight Liability

Penalty Rewards

Principal Agent Definition A party who delegates others to

perform some service on his or her behalf. The principal often contracts with an agent to safeguard and enlarge a pool of assets which the principal owns and with which the agent is entrusted.

A party engaged as a steward to perform some service on the behalf of others, often involving safeguarding assets belonging to them. The principals delegate decision making authority to the agent

Asymmetric Information

Principal knows agent has access to superior information

Agent has access to superior information

Moral hazard Principal incurs monitoring costs to attempt to make sure agent acts in appropriate ways

Agent may be able to act in ways unfavorable to or not approved by the principal – shirking, fraud, etc.

Monitoring costs a. Budget constraints, auditing b. Profit sharing, stock options and similar incentive plans to align agent’s self-interest with principal’s interests

Agents also benefit from monitoring activities like an audit since such devices permit them to demonstrate effective performance and charge more for their services

PRINCIPAL-AGENT THEORY

POSITIVE ACCOUNTING THEORY

Assumptions:The accountants (and, in fact, all individuals) are primarily motivated by self-interest (tied to wealth maximization), and that the particular accounting method selected (where alternative are available).

THE 2 (TWO) VERSIONS OF PAT

Theory Perspectives1. Opportunistic Version

Managers choose accounting policies for their own benefit

2. Efficient Contracting VersionManagers choose accounting policies to attain corporate governance objectives of the firm

.

Why doing Research? The Society needs the Result of the

Research to:1. Contribution to Understanding;2. Problem Solving;3. Reducing of Uncertainty; and 4. Predicting of Phenomenon.

EMPIRICAL RESEARCH IN ACCOUNTING

RESEARCH ELEMENTS

Idea

Researcher

Method

Environment

Research is constructing proces and theory verification.

RESEARCH ELEMENTSThere are activities which covers: (1) idea; (2) researcher; (3) method; (4)

environment1. Interact among the elements will

produce research; 2. Environment function as a reseources of

idea and knowledge; 3. Academic function will effect to person

quality; 4. Quality of reseacher will effect to their

idea;5. Researcher must have konowledge of

research method.

PROBLEMS STATEMENT

Poblem statement depends on: 1. Research Environment, 2. Research Objective, 3. Research Area (current issues).

Scope of the Research:1. General2. specific

SCIENTIFIC METHOD AND NATURALISTICS

Scientific methodForm and Control of Research Design

Problem definition

and conceptu

al structure

Developing

Hypotheses

Empirical

Testing

Result

MODEL, THEORY & REASON

Triangulation support two approach (scientific method and naturalistic method) for different research objective.

Research Objective:(a) to describe; (b) to explain; and (c) to predict.

Objective a, b, and c, should be conduct by different researcher.

The Classification Function:1. Understanding problems - deskriptif and

prediktif2. Solving problems - normatif

FACTORS THAT EFFECT OF ACCOUNTING RESEARCH DEVELOP

1. Integration among Theory of Finance, Information Systems, and Accounting Behavior;

2. Capital Market DataBase (Compustat, CRSP, IBES, Global Vantage, Pacab dBase, INASX/JSX, Pojok BEI);

3. Financial Reporting Environment, Accounting Standards, and the Result of Empirical Testing;

4. Journal, conference, academic attitude, professor promotion.

FACTORS THAT SUPPORT ACCOUNTING RESEARCH

1. Sensitivity, interested in accounting phenomenon;

2. Skill of basic knowledge in accounting framework;

3. dBase support and resources,4. Skill of Statistics tools and Research

Instrument; 5. Skill of Research Method.

EXAMPLE: RESEARCH AREA IN ACCOUNTING PROGRAM

Financial Accounting

Akuntansi Keuangan

Accounting Theory

Capital Market

Behavioral Finance

Financial Accounting

Behavioral Science

Management Accounting

Auditing

AIS and MIS

Taxes

Earnings, Cash Flows, Economic Consequences, stock split, Dividend,Insider trading, Financial Reporting,Bonus Plan, Merger & Acquisition, Debt Covenant Violation, Political Cost, Standard setting, Return, Price Stock, CAR, Accounting/Stock Beta, Earnings Response Coefficient, IOS, Belief revision, B&B paradigm, Fifo and Lifo Inventory, Current and future earnings, Industry earnings, Inform content, ratios, EMH, Methodology, etc.

Budgeting, Target costing, ABC & ABM Costing,Performance Measurement, APE,Fee audit, Audit technology, Audit delay. Auditor specialization,Working papers, Auditor Change,Materiality, Balance Score Card,JDM individual, Agency Theory,Good Corporate Governance,Gender, Expert systemCreativity softwareEthical Decision MakingTax AvoidanceTax Evasion, etc.

Research Branch Research Area Example Research Variable

Finance

Budgeting

G Corporate G

EXAMPLE: RESEARCH AREA B&B PARADIGM

Ball & Brown Study (1968)

Easton, Harris, dan Ohlson (1992),

Beaver (1968),

Altman (1968),

Ou and Penman (1989),

Wilson (1987), Livnat and Zarowin (1990),

Bamber and

Cheon (1995), Baron

(1995),

Ohlson (1980),

Dechow (1994), Sloan (1996),

Healy (1985), Jones (1991), Cahan (1992), Sweeney (1994),

Accrual Accounting Study

Earnings Management

Return and Cash Flows Relationship

Financial Ratio and Earnings Prediction

Financial Ratio and Bankrupting

Earnings and Volume Trading

Earnings and Return Relationship

Ou (1990)Penman (1990)

ACADEMIC RESEARCH

Thesis BSc./Skripsi

Sarjana)

Thesis (Master) Level

Dissertation (PhD) Level

Full Replication?

Extend / Expand?

Building Theory?

Question? Where is the origin or idea researcher?

AnswerResearcher can described current research and different with prior research.

ISSUES From accounting framework

THEORY purports to explain

CONSTRUCTS Elements of theory

RELATIONSHIPS Among elements

VARIABLES Measures of constructs

HYPOTHESES Derived from relationships in theory

DATA COLLECTION

RELIABILITY Measurement error

DATA ANALYSIS RESULTS

Test of hypotheses

Inferences

regarding theoretical relation-

ships

Sheds light on issues

EMPIRICAL RESEARCH FRAMEWORK

RESEARCH DESIGN

Research Hypothesis Derivation

Observation Result / Data

Analysis

1.

2.

3.

P-value

t = ?

P-value

t = ?

P-value

t = ?

Grand Theory/ Empirical Theory/ Normative Theory

FIGURE: RESULT OF THE RESEARCHExample:

Proposal and Research Content

CHAPTER I INTRODUCTION 1.1. Research Problem 1.2. Research Motivation 1.3. Research Contribution

CHAPTER II THEORETICAL FRAMEWORK 2.1. Literature Review 2.2. Prior Research 2.3. Hypothesis Development

CHAPTER III RESEARCH METHODS 3.1. Population, Data and Sampling 3.2. Variable Measurement 3.3. Research Model

CHAPTER IV RESULTS AND DISCUSSION 4.1. Descriptive Statistics 4.2. Result of Hypothesis Testing

CHAPTER V CONCLUSION AND RECOMEND 5.1. Conclusion 5.2. Recommendation 5.3. Implication

Research Proposal

Ch. I, II, and III

Report of the Research:

Ch. I, II, III, IV, and V

RESEARCH STRUCTUREIssue in Business

Construct Theoretical Base

Variables

Data Selection and Collection

Data Analysis and Reporting

Hypothesis

Testing

SFAC

# 1

USEFUL

NESS

INFOR-

MATION

INVEST-

MENTS

CREDIT

OTHERS

MARKET

TEST

EFFICI-ENT

NOT EFFICIENT

NOT EFFECTIVE TO TEST ACCOUNTING INFORMATION

STRONG FORM

SEMI STRONG

FORM

WEAK FORM

AREA

OF TESTING

FINANCE AND CAPITAL MARKET RESEARCH

INFOR-MATION

BALANCE SHEET

INCOME STATEMEN

T

CASH FLOWS

STATEMENT

OTHER DISCLOSURE

ACCOU-NTING REGULATION

S

STANDARDS

CONCEPTS

THEORIES

RELATED INSTITUTION REGULATION

S

FINANCIAL ACCOUNTING RESEARCH

EMITEN AS

SAMPLE PROFIL

MINOR PUBLIC

OWNERSHIP < 40%

THIN TRADING

LARGE TRADING

MAJOR TRADING

OWNERSHIP

METODO-LOGY

MODELREPRESEN-

TATION

MARKET BASED ACCOUNTING RESEARCH

FUTURE RE-

SEARCH

ECONOMIC CONSEQUEN-

CES

MARKET EFFICIENCY

INFORMATION CONTENT

EARNINGS

METHODOLOGY

POSITIVE ACCOUNTING RESEARCH

THE DEEPER INVESTIGA-TION ON BEHAVIOR OF MARKET IN DEVIATION MARKET EFFICIENCY

STUDY ON FIT & FULL DISCLOSURE

STUDY ON ACCOUNTING SYSTEM AND VALUATION IMPACT TO EARNINGS

STUDY TO REDUCE CONFOUNDING EFFECT

FUTURE RESEARCH IN ACCOUNTING