origins to the present day, focusing on external and cognitive influences. The impetus for
the development of accounting as an academic discipline came from events like the 1929
stock market crash in the US and the Royal Mail case in the UK, which prompted a search
for a coherent set of principles to underpin financial accounting practice. Paton and
Littleton’s income determination model filled the theoretical void for many years, and
sparked off what has been called the ‘golden age’ of a priori (i.e. deductive) research in
financial accounting, based largely on economic theorising.
Gradually, however, the limitations of the income model became increasingly apparent.
It was unable to offer guidance on the appropriate accounting treatment of thorny
accounting issues such as pensions and goodwill. It was also gradually realised that no
single measure of true income existed, rather the appropriate measure depended upon the
decision-context. During the early 1960s, the income determination model gradually gave
way, therefore, to a decision-usefulness (or user needs) approach. This was accompanied
by an interest in conceptual frameworks to counter the political nature of standard-setting
arising from the economic consequences of those standards.
At about the same time, there was a drive in the US towards a more ‘scientific’
approach to management research. Two distinct areas of empirical research developed—
behavioural accounting research (BAR) and market based accounting research (MBAR).
Both areas allow the decision-usefulness of information to be investigated. BAR examines
the decision processes of individual users and draws on the discipline of psychology for its
concepts, methods and models. It includes surveys (conducted via questionnaire and/or
interviews), experiments and case studies. MBAR examines the relationship between
accounting information and share prices (or returns) (the capital market can be thought of
as the aggregate investor), and relies on economics and finance as foundation disciplines.
This line of research was sparked off by an interest in the ability of accounting information
to predict different variables of interest (such as company failure and share prices) and the
development of the efficient market hypothesis (EMH). It was facilitated by Ball and
Brown’s (1968) development of the share price residual approach to measuring stock
market reaction, and the emergence of electronic databases containing share prices
(CRSP), financial statement data (Compustat and Datastream) and (more recently)
analysts’ earnings forecasts (IBES). The focus of research was on short-window event
studies (termed market reaction or information content studies) and studies of the capital
market consequences of accounting standard setting.
During the late 1970s, Watts and Zimmerman (1986) developed a positive theory of
accounting which drew on contracting theory and political cost arguments to explain and
predict the accounting choices made by companies and their position when lobbying
standard-setters. This theory became one of the main theoretical underpinnings of BAR
and MBAR. Empirical studies based on positive accounting theory contrasted sharply with
the earlier normative theory.
In recent years, the research agenda has been influenced by studies that cast doubt on the
validity of the efficient markets hypothesis in its semi-strong form. This has led to renewed
interest in experimental financial BAR, interest in the differential impact of recognition
versus disclosure, a shift in the focus of earnings management studies, and a major growth in
fundamental analysis and equity valuation studies. The research agenda has also been
influenced by external events, principally the globalisation of world capital markets,