Accounting Theory: Positive or Narrative?

image Since the development of contemporary research of accounting in 1992, when numerous HK scholars started to conduct the empirical researches under the Chinese stock market, a discussion between the traditional (We call Narrative Accounting Theory) and the contemporary (We call it as Positive Accounting Theory, PAT) theory has been started for decades until recent years. Now the empirical research has been a popular trend in China, which can be easily observed from the conference proceedings,  working papers and published papers, especially those from young scholars.

But apparently the research nowadays in China is losing its way. Grounded on the accounting research framework that is introduced by the William R. Scott (2006) and Watts and Zimmerman (1986), two popular textbooks for contemporary accounting research, the directions has been lost. You can easily find the similarity of the papers from the scholar of accounting and those from other fields like banking, finance and economics. Taking the recent hot topics like political connection, lend contracts for example, which are both based on the corporate finance, has little connection to the fundamental understandings of the field of accounting, for both the accounting professors and accountants who are working as role of practitioners. For a brief introduction on books of accounting theory, refer to a post published previously.

The reason for this bias may come from the development process itself. For most researchers, they are in fact quite familiar with the traditional theories and thus can write good papers with such stuff. But the transition of methodology changed their way. A preliminary assumption for empirical research is its good competence on computer programming and sufficient understanding on econometrics and statistics. Frankly, it is a disaster for most scholars who seldom receive strict training on quantitative analysis when they were graduate students. Such problem even exists for the new generation students like us. The lack of training on fundamental instruments can cause great problems on research design, that can partially explain why so many errors on modeling of accounting papers. And, besides the fundamental theory, some new theories in finance and economics are introduced, like asset pricing, market efficiency, etc.

The transition on both supporting theory and instruments cost too much time and energy for both scholars and researchers in this field. Given the publication as a key standard of promotion, an easy way for publication but without deep thinking on its fundamentals are needed. Admittedly, this is a necessary step that can hardly be avoided. In fact, I did such foolish things in the past two years. Comparing to the papers discussing accounting policy and methods, such as recognition on loss and revenue, the topics on corporate finance can be much easier to understand for both researchers and readers. That’s why we can see many corporate finance papers in the journal of accounting these years, but few papers on financial accounting can be found. What’s more, quite a lot of scholars are not from the major of accounting as their undergraduate major, and they may have missed essential courses to help them understand the core accounting questions.

In fact, by doing accounting research on accounting itself, rather than the corporate finance, though it may be more attractive to most scholars, a scholar may face the coherence on the PAT and narrative accounting theory. The narrative accounting theory help us understand how an optimized accounting plan would be, and the PAT showed us the incentives from multi-parties that can affect this optimization. In fact, William R. Scott is just trying his best to build up this link, providing us the understanding of the fundamental theory that is not presented in a published paper, whose work is of significance to the graduate students like us.

Many discussion on the conflicts between these two types of theory, presented on both blogs and academic journals, even in quite a lot of books, are quite superficial. Only when linking both these theories can the high quality research be produced. Though, I am also still thinking about how to. Just like a previous post that I wrote in this blog, we need to think real questions and do real research. The link on these theories, in fact, provides its preliminary step.


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