Accounting Research - Essay Example

Introduction Accounting research happens to be one of the most important and widely recognised fields of research because of its relevance to the determination and evaluation of several important economic and social factors. The accounting theories can play a significant role in informing investors, individuals, practitioners as well as corporations regarding the capital market functioning, stock price movements, investor reaction and impact of information etc. However, there has been considerable criticism on accounting research pointing to the fact that it has been ineffective in putting much impact on the world. The assumptions upon which the accounting research mainly relies have been playing a great role in contributing to lessening its relevance in real market situations. This paper provides criticism on several aspects of research in accounting theory that strengthen the argument suggesting its ineffectiveness. It also presents the aspects of accounting research that have been helpful in real market scenarios. Impact of Accounting Research Research on accounting theories is considered to have a significant impact on individual perception, earning and distribution of wealth, allocation of social resources and the direction for improvement in accounting reporting as well as standards. Accounting research has a very significant role to play in enlightening accounting professionals about several key measures such as earnings, investor reaction probabilities, stock price movements etc. It does not only influence the economic aspect of individuals and corporations but can also affect the whole society by means of earning distribution and wealth allocation. Baker suggests that "throughout society, the influence of accounting permeates the fundamental issues concerning wealth distribution, social justice, political ideology and environmental degradation." (2000, p375) It is because accounting is an important field economically, socially and also environmentally, the research in this subject can help determine major modes of action for professionals. The impact of the research in the field of accounting theory has however been little on the world. There seem to be several views and dimensions of accounting research that lack practicability and relevance when it comes to practical world. The assumptions and the directions that the accounting research adopted has hampered its way to prove its application on real markets. The most significant of these aspects is the Efficient Market Hypothesis. The Efficient market hypothesis constitutes a great deal of accounting research and is considered to be one of the most significant accounting theories. However the fact is that this theory is still considered to be hypothesis because of its unrealistic relevance to reality. There is no market in the world that could serve to validate this hypothesis. The accounting research on efficient market i.e. relation between information and market price movement has failed to have a considerable impact on the world (Gaffikin, 2007). It is simply because of the fact that the assumption this theory relies on has less relevance to the real world. The markets that are completely efficient characterised by immediate investor reaction to new information is simply idealistic. This is why this theory has failed to have any significant impact on real markets. Accounting research has exhibited profound emphasis on the assumption that investors react rationally to information and take economically rational decisions. Accounting theories, for instance, the capital market research and Efficient Market Hypothesis rely on the assumption that investors respond rationally to new information however there has been significant evidence that investors mostly act irrationally (Gaffikin, 2007). In the event that investors act irrationally to the new information, it is not possible to apply these theories to the real situations going on in the market. However, these theories along with this assumption can be useful in evaluating the investor reaction, in actuality, to different information. The research in the area of positive accounting theory indicates that the accounting can be utilised well as a means of generating information concerning stock price movements and investor reactions. Watts and Zimmerman (1990) elaborates that the view of accounting research as a means to provide information about stock market investment, accounting figures and movement of stock prices have had little impact on the selection and prediction of accounting choices concerning depreciation methods etc. The author says that accounting research has had a profound emphasis on choice of single accounting method rather than a combination of accounting choice. This has led to the impact of accounting research less vivid on how accounting choices affect a company's earnings. It does not only lessen its effectiveness in management decision-making but also delimit its usefulness for investors. Accounting research has focused more on singular rather than on collective dimensions, which strengthens the argument that it has been ineffective in putting much impact on the world. Furthermore, the major theories in capital market accounting research i.e. portfolio theory and Capital Asset Pricing Model could only be applied to markets that are assumed to be efficient markets (Gaffikin, 2007). There has been striking reliance of accounting research on the Efficient Market Hypothesis in not only determining investor responses but also the capital market functioning. The research on portfolio theory analyses the investment which is thoroughly diversified into different securities, however it cannot be utilised effectively in real market conditions because of the assumption of market efficiency. The same is the case with the Capital Asset pricing model which analyses a single security with respect to the whole market. These theories have high importance in accounting research, both academically and professionally, but have severe limitations for practitioners. With the emergence of globalisation and internationalisation, there has been considerable attention in the accounting research towards harmonisation of accounting standards. More emphasis has been towards protection of international investors' interests as owners of a firm but less focus is directed on the issue of betterment of international society in the domain of accounting research. Lehman illuminates that "harmonisation and decision-usefulness attempt to secure worldwide investor confidence in free-markets, but only perpetuate modernity's technical stance to community and society." (2001, p. 4) This issue is becoming more evident as more and more companies are moving towards internationalisation and standard setting bodies are becoming more involved in designing a set of harmonised accounting principles. There has also been a valid counter-argument that accounting research cannot practically determine the structure of accounting standard setting. It is something outside the realm of accounting research and fall much into the responsibilities of standard setters and practitioners. What accounting research should mainly be concerned with is the provision of information and evaluation of issues facing standard setting. Barth elaborates this point as "research aids in identifying issues, helping standard setters and others structure their thinking about a particular issue, and providing evidence that speaks to an issue." (2000, p. 9) Hence, researchers in the accounting field are mostly not the practitioners and therefore have very less influence on the decisions taken by the professional bodies and practitioners. It is also important to note that some aspects of accounting research have helped individuals and practitioners in better understanding of corporate earnings and markets. Watts and Zimmerman (1990) propounds that economic approach has had significant impact on the world's understanding of relationship between company's profit and stock price movement as well as the factors influencing manager's accounting choice. This approach of accounting research studies the individual behaviour based on cost-benefit analysis. Rather than focusing on the assumption that investors act rationally to the information and efficient market hypothesis, this approach emphasises the individual investor's behaviour with respect to the rational evaluation of gains and sacrifices. The most critical aspect of the ineffectiveness of accounting research in influencing the world has been its impact on shaping the corporate behaviour with respect to social and environmental concerns. The existing research has failed to focus and influence the corporate practices that go against the interest of society. However, it has the potential to put an impact on the way individuals and corporations interpret their influences on environment and community. It can only be hoped that "future accounting research might work toward explaining the means through which corporations might be enabled to act in the interests of the communities they serve" (Lehman, 2001, p. 2) Conclusion This paper discusses the ways through which accounting research has been ineffective in providing right information, identifying issues and evaluating investor behaviour. The assumption concerning market efficiency and less emphasis of accounting research on social aspect has been the major reason behind the fact that major accounting theories rely on unrealistic assumptions. These unrealistic assumptions make difficult the applicability of accounting theories put forward by researchers to real market conditions. Also the most important determinant of the impact of new information in the market, i.e. the investor reaction, is mostly irrational and unpredictable. The assumption that the investors react in economically rational manner to new information also contributes to the irrelevance of theories to practical situations. Besides these criticisms, it is also important to note that the focus of accounting research has now been shifting gradually towards investor behaviour rather than the rational investor reaction. Furthermore, the significant role of accounting research in providing valuable information, critique and evaluation of major issues is undeniable in helping investors and practitioners. Reference List Barth, M.E. (2000). Valuation-Based Accounting Research: Implications For Financial Reporting And Opportunities For Future Research. Accounting and Finance, 7, pp. 7-31 Watts, R.L. and Zimmerman, J.L. (Jan. 1990). Positive Accounting Theory: A Ten Year Perspective. The Accounting Review, 65(1), pp. 131-156 Baker, R.C. (Dec. 2000). Towards the Increased Use of Action Research in Accounting Information Systems. Accounting Forum, 24(4), pp. 365-378 Lehman, G. (Mar. 2001). Accounting Research Prospects. Accounting Forum, 25(1), pp. 1-6 Gaffikin, M. (May, 2007). Accounting Research and Theory: the age of Neoempiricism. Working Papers Series, University of Wollongong, pp. 1-21 Read More