Positive accounting theory,political costs And social disclosure analyses: a critical look

This paper critically reviews the literature seeking to establish evidence for a positive accounting theory of corporate social disclosures. Following Reiter (1998), the paper provides detailed evidence and an illustration of how positive accounting theorists’ attempts to colonize social and environmental accounting research have proved a failure. The paper carefully traces through the original work of Watts and Zimmerman (1978) showing their concern with the lobbying behaviour of large US oil companies during the 1970s. Such companies were argued to be abusing monopolists and likely targets of self-interested politicians pursuing wealth transfers in the form of taxes, regulations and other “political costs". Watts and Zimmerman’s reference to “social responsibility" is shown to be a passing remark, and most likely refers to “advocacy advertising", a widespread practice amongst large US oil companies at that time. Subsequent literature that relies on Watts and Zimmerman to present a case for social disclosures is shown to extend their original arguments. In the process, concern over the “high profits" of companies is shown to diminish, and the notion of political costs is so broadened that it blurs with other social theories of disclosure. Consequently, the positive-accounting-based social disclosures literature fails to provide distinct arguments for self-interested managers’ wealth maximizing. This paper also shows that the empirical evidence gathered to date in support of a positive accounting theory of social disclosures largely fails in its endeavour.