The intellectual antecedent of positive accounting theory is the income
smoothing hypothesis proposed by Gordon (1964). Within his framework,
income smoothing emerges as rationsil behaviour based on the assumptions
that (i) managers act to maximise their utility, (ii) fluctuations in income and
the unpredictability of earnings are causal determinants of market risk
measures, (iii) the dividend payout ratio is a causal determinant of share
values, and (iv) managers' utility depends on the firm's share value
(Beidleman, 1973; and Watts and Zimmerman, 1986, p. 134).