Accounting choice theory and market-based research in accounting

Abstract

This paper summarizes the theory and evidence on accounting choice for capital markets researchers. It also explains why knowledge of that theory and evidence is important to capital markets researchers. Many capital market studies such as those of the relationship between earnings and rates of return assume that accounting choice does not vary with firm variables such as growth, gearing etc. Theory and evidence indicates such variation exists. Hence, accounting choice theory provides competing hypotheses for observed relationships in the capital markets literature such as the relation between earnings response coefficients and gearing.