Literature review and hypotheses development
2.1 Prior studies
Positive accounting theory, which is associated with Watts and Zimmerman (1986), assumes that the market is efficient such that the market participants will see through observable smoothing devices such as accounting policy choice. Holthausen (1990) identifies three overlapping perspectives on accounting choice: opportunistic behaviour, efficient contracting, and information perspectives. The two contracting perspectives (efficient contracting and opportunistic behaviour) are based on the existence of contracts which rely on accounting numbers.