3
need a theory to have some justification for expecting a relationship to exist. Where we have none our hypothesesare immediately disputable.
• Hypothesesare supposed relationships, possibly causal links, between two or more concepts or variables. A hypothesis should be testable, but it may not be directly so if it comprises a number of abstract concepts.
• Conceptsare abstract ideas, not directly observable or measurable, which must first be ‘operationalised’ in some way to provide measurable indica- tors. This will be achieved either by identifying a variable that is an ade- quate substitute for the concept or by developing a constructto provide a new measure of the concept.
• Constructsare indirect measures of concepts usually generated in the form of multi-item questions. The sum of a set of valid and reliable responses to the construct provides a measure of the concept.
• Variables are observable items which can assume different values. These values can be measured either directly or, if this cannot be done satisfac- torily, indirectly through the use of proxy (substitute) variables. Variables are usually independent (i.e., explanatory), dependent (i.e., are explained by the independent variables), moderating (i.e., have a conditional influ- ence) or intervening (i.e., with an influence, potentially spurious, that needs to be controlled).
• Reliabilityestablishes the consistency of a research instrument in that the results it achieves should be similar in similar circumstances. Thus, the same survey subjects (participants) using the same instrument should gen- erate the same results under identical conditions.
• Validity measures the degree to which our research achieves what it sets out to do. We would usually distinguish between construct validity, inter- nal validity and external validity, each of which will be addressed later in this chapter and in subsequent chapters.
We can illustrate these terms with reference to particular examples in the accounting literature, and many further examples will arise in subsequent chapters. The source of most theoryin accounting research comes not from the accounting literature but from the economics (and finance), behavioural and sociology literatures. Thus Smith and Taffler (2000) use signalling theory to examine the nature of corporate disclosures, in the expectation that firms will behave in a manner that ‘signals’ to the market that they are high achievers and are adopting industry best-practice. They use this as a basis to establish a formal hypothesis, for subsequent testing, that the positive content of corporate narratives will be directly associated with the financial perfor- mance of the company.
Brownell (1982) establishes a concept, termed ‘budgetary participation’
in his study, as one of the desirable attributes of leadership in management.
He is unable to measure this concept directly so he uses the Milani (1975) construct to operationalise it instead. This multi-item instrument measures influence, involvement and participation in budget-setting but is deemed a satisfactory indicator of budgetary participation.
F I G U R E 3 . 1
Much of the literature examining agency relationships (e.g., Watts and Zimmerman, 1978) uses ‘political influence’ as one of the variables under examination, but because of the difficulty in observing and measuring this variable directly, company size (measured by assets or employees) is often used as a proxy variable.
The formal reliability of the research instruments employed is rarely addressed in the accounting literature; only survey-based research makes a virtue out of the use of measures like the Cronbach alpha to detail the degree of confidence we have in the means of data collection. Questions of validity are best considered in the trade-offs we have to make, usually between relia- bility and construct validity on the one hand, and between internal validity and external validity on the other. Thus, in the example cited above, Brownell chooses to use the well-accepted Milani instrument. Reliability is not in doubt because this instrument consistently generates high Cronbach alphas, but construct validity is in doubt since Brownell wants to measure
‘participation’ in budget-setting but the chosen instrument also measures
‘influence’ and ‘involvement’. The construct being used may therefore not be measuring exactly what is required or being specified. Figure 3.1 illustrates the problem we encounter in striving to achieve construct validity.
We start with a theory which establishes a series of relationships between ill-defined concepts. These may be difficult to pin down and impossible to measure directly. We first search for an observable variable which may act as a proxy for the concept. For example, ‘absenteeism’ is often used in the man- agement literature to proxy for the concepts ‘morale’ and ‘team spirit’. But if we consider these to be inadequate proxies, then we need to search for an alternative, perhaps by identifying a construct that satisfactorily measures the concept. Ideally, an established construct will already be in existence to mea- sure exactly what we want – this is the best of both worlds: reliability and con- struct validity. More often we are faced with a dilemma: either use an established construct which does not quite hit the target (threatening construct validity) or develop a new or adapted instrument, by devising a revised set of
T h e o r y , L i t e r a t u r e a n d H y p o t h e s e s 41
Abstract Concepts
Variables
Observables
Proxy Variables
Reliable Measurement Valid Constructs
Theory
Searching for construct validity
questions, which does hit the target (threatening reliability). The former trade-off is the one most likely to be encountered in the accounting literature, though we might argue that we would prefer to see more of the latter.
If we have internal validitythen we are able to eliminate rival hypotheses with confidence because we can specify causal relationships; we know what is causing what because we are controlling for all other influential factors.
This scenario only precisely fits experiments under laboratory conditions, conducted under strict control and perhaps based on unrealistic assumptions.
The findings may have no external validity whatsoever; they cannot be generalised to the ‘real world’ because they only apply in the laboratory. This is another fundamental trade-off, and one where we may have to compromise loss of internal validity (loosening the confidence we have in the relation- ships) in order to increase external validity (and realism).
Both construct validity and internal validity are wholly dependent on good theory: establishing a research design with appropriate concepts, which are underpinned by theory and which are realistically linked to their means of measurement. It is instructive to turn first to the sources of theory avail- able to accounting researchers and to look at these in more detail.
The fundamental distinction underpinning accounting theory is that between normative theory (of what ought to be) and positive theory (of what is or will be). Much of the pioneering work in financial accounting (e.g., Littleton, 1933; Paton and Littleton, 1940) was an embodiment of current practice to establish what oughtto be the optimal accounting practices, parti- cularly for income determination purposes. Such research offered little opportunity for empirical testing or for the development of positive theory, concerning, for example, how managers and investors would actually react to the provision of new accounting information in their decision-making. We look particularly at developments in economics, finance and organisational behaviour for sources of testable theory that may be applied in an account- ing environment; the coverage here is necessarily not comprehensive, but illustrative of the potential sources in other disciplines.
Economics
Early researchers (e.g., Canning, 1929; Edwards, 1938) used economic analy- sis in a deductive manner to develop alternative approaches to income deter- mination, theorising which was subsequently combined with normative findings by Bedford (1965) to provide a conceptual framework for income determination. Much earlier still, the neoclassical theory of the firm had established an economic framework with fundamental assumptions: decision- making by rational, profit-maximising individuals, working under conditions of certainty, and with freely available information. These basics have had far-reaching effects, leading, for example, to the development of normative decision-making models of practices which would yield profit-maximising outcomes under appropriate assumptions (e.g., those associated with
linear programming solutions, cost–volume–profit analysis and discounted cash flows). But neoclassical theory is unhelpful in providing guidance on the practical behaviour of individuals without significant modifications to the general theory, and a relaxation of its key assumptions:
• Friedman (1953) established the positivist economics perspective: that the purpose of theory is to enable us to make verifiable predictions. In doing so he suggested that even if theory makes unrealistic assumptions, it does not matter so long as verifiable predictions result. These sentiments pro- vided the impetus for the positivist approach to accounting typified by Watts and Zimmerman (1986).
• Simon (1959) developed the concept of ‘bounded rationality’, which per- mitted the emergence of ‘satisficing’ rather than ‘maximising’ behaviour.
• Kahnemann and Tversky (1972) recognised that decision-making under conditions of uncertainty required the development of appropriate behav- ioural theories, theories which have lead to a stream of accounting research concerned with decision-making heuristics and decision processes (e.g., Joyce and Biddle, 1981; Smith, 1993).
• Demski and Feltham (1976) explored information economics theories.
• Watts and Zimmerman (1978) developed the concept of managerial self- interest (itself a neoclassical notion) as part of a principal–agent relation- ship, forming what they termed ‘a nexus of contracts’ between managers and shareholders, and between managers and subordinates.
• Williamson (1979) developed a theory of economic organisation to explain why activities are organised in particular ways and how choices are made, with implications for accounting research on decision processes (e.g., Spicer and Ballew, 1983).
• MacIntosh (1994) details the labour process paradigm devised by Marx and Engels and which was based in the tradition of political economics. This view places the manager in the position of both victim and user of management accounting information and control systems, and provides for a stream of accounting research in the radical structuralist tradition (e.g., Tinker, 1980).
Each of these developments has had a wide influence on accounting research, particularly in terms of decision-making processes, the motives of the decision- maker and the way in which accounting information is used. They have coin- cided with the prominence of the decision usefulness approach to financial accounting, especially since the 1970s, prompting empirical developments in the pursuit of a conceptual framework for accounting – a body of knowledge underpinning the discipline.
Finance
Although we might perceive finance as a sub-discipline of economics, the developments in this field have had such a radical influence on accounting
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research that they deserve separate consideration. Advances in finance theory have had implications particularly for research in financial management, cor- porate policy and investor behaviour:
• Markowitz (1952), with work on portfolio risk, lead to Sharpe (1964) and the capital asset pricing model. This formed the basis for the pioneering work of Ball and Brown (1968), linking stock market reaction to the pro- vision of accounting information.
• Modigliani and Miller (1958) developed a theory regarding the risks asso- ciated with capital structure.
• Fama (1970) developed the notions of market efficiency associated with the processing of stock price information.
• Black and Scholes (1973) formulated the option pricing model as a vehi- cle for handling decision-making under uncertain conditions.
• Jensen and Meckling (1976) first expounded the agency costs argument associated with debt–equity trade-offs, which initiated a stream of research linked to the choice of accounting policy, and subsequently to management accounting (see Baiman, 1982).
• Ross (1977), following Spence (1973), initiated incentive-signalling theo- ries in finance, spawning a research stream concerned with voluntary dis- closures in financial reporting.
• Scott (1981), following Myers (1977) and the financial economics tradi- tion, developed a theory of corporate failure based on cash flows, under- pinning some of the earlier work in failure prediction (e.g., Altman, 1968;
Beaver, 1966; Taffler, 1983).
Organisational behaviour
Robbins (1995) observes three levels of research interest in organisational behav- iour, associated respectively with individuals, groups and organisation systems, and he develops a theoretical framework for each. Models at the individual level are heavily influenced by the psychology discipline, while those at the group and organisation level are influenced more by sociology and social psychology. All have been highly influential in the development of accounting research.
The individual focus looks at contributions to knowledge from the impact of, for example, learning, motivation, personality, perception, train- ing, leadership, job satisfaction, decision-making, performance appraisal, attitudes and behaviour, together with their relationship to biographical characteristics. A selection of the multitude of theories generated in this area illustrates their potential accounting applications:
• Kelley (1972) developed attribution theory to explain how we perceive people differently depending on the meaning that we attribute to a given behav- iour. This would have relevance to management accounting research based in the appraisal of subordinate performance by managers (e.g., Mia, 1989).
• Bandura (1977) developed social learning theory, suggesting that we learn through both observation and direct experience so that individual percep- tions can be influenced by teachers, peers and the media. This would impact on the development and maintenance of accounting stereotypes and impact on accounting recruitment (e.g., Friedman and Lyne, 2001;
Smith and Briggs, 1999).
• Festinger (1957) developed cognitive dissonance theory to explain the relationships between attitudes and behaviour, and the potential impact of conflict therein on both individual and organisation. The theory is rele- vant to studies of accounting research involving conflicting information or where messages conveyed are alien to the user (e.g., Smith, 1998b; Smith and Taffler, 1995).
• Bem (1972) developed self-perception theory to argue that attitudes are used to rationalise behaviour choices after the event. Such outcomes are evident in the incidence of hindsight bias in interview-based accounting research.
• Early motivation theorists (e.g., Herzberg, 1966; McClelland, 1967;
Maslow, 1954) identified various intrinsic and extrinsic rewards which motivate performance. More recently, expectancy theory (Lawler, 1973) has become the most widely accepted explanation of motivation, arguing that behaviour will depend on the likelihood of our attaining an attractive reward. This theory has been used in the accounting literature by Ronen and Livingstone (1974) to suggest that subordinates will only expend effort in the expectation that their actions will provide intrinsic and extrinsic satisfaction. It has subsequently been used to explore the major behavioural variables linked to the motivation effects of budgets (e.g., Ferris, 1977; Rockness, 1977).
The group focus looks at the contribution to knowledge of the impact of group dynamics and processes, communication, behavioural and attitude changes, norms, roles, status, power and conflict:
• Argyris (1952) and Becker and Green (1962) use contingency theories to explore the impact of group dynamics on the budgetary process.
• Barrow (1977) developed a contingency theory of leadership in trying to explain successful leadership and consequent group behaviour as a com- bination of specific leadership styles and situational conditions.
• Vroom and Yetton (1973) developed the leader–participation model, a popular contingency variant, to relate leadership behaviour to participa- tion in decision-making, while emphasising the importance of task struc- ture. This theory has clear implications for accounting research in areas such as budget-setting.
The organisation systemsfocus looks at the contribution to knowledge of the impact of organisation culture and change, structure and hierarchy, conflict
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and power structures, together with their relationship to human resource policies and job design:
• Organisation theorists (e.g., Burns and Stalker, 1961; Woodward, 1965) explore the relationship between environmental and organisational vari- ables. Accounting researchers have expanded the scope of these variables to include relationships between the environment (e.g., technology, uncer- tainty), the organisation (e.g., structure, task complexity, decentralisation, supervisory style, job-related tension) and accounting variables (e.g., per- formance evaluation, budgetary participation). The aim is to produce a contingency theory that ‘must identify specific aspects of an accounting system which are associated with certain defined circumstances and demonstrate an appropriate matching’ (Otley, 1980, p. 414). Such studies have established relationships between accounting practices and environ- mental and organisational factors, and have produced a recognised body of knowledge (see Otley, 1984), which is arguably the most coherent in management accounting.
• Berry et al. (1985) adopt a case-study approach based in sociological and conflict theories to explore the complexity of organisational processes in the National Coal Board.
• Other organisation theorists (e.g., Ouchi, 1977; Perrow, 1970, 1972;
Thompson, 1969) have provided alternative frameworks for systems theory that have facilitated the discussion of the roles of control structures and subordinate behaviour. This has allowed developments in accounting research on budgetary control devoted to the distortion of accounting information systems (e.g., Birnberg et al., 1983).
Alternative research methods are consistent with these different theoretical approaches for individual, group and organisation focus. Thus experimental methods (based on behavioural and psychological expectations) will most frequently be used to measure individual behaviour; survey methods can be used to reveal self-reported attitudes and preferences, and case studies used to explore organisational change. However, a note of caution is warranted in that a consistent factor of the studies in the organisational behaviour area is their focus on relatively few dependent variables: productivity, absen- teeism, job turnover and job satisfaction predominate to the exclusion of almost anything else. Staw (1984), among others, has argued for more atten- tion to be devoted to new dependent variables, such as job stress, innovation and individual dissent. Briers and Hirst (1990, p. 374), in their review arti- cle, show that the contingency theory literature in accounting has followed a very similar line, in that only four major dependent variables (dysfunc- tional behaviour, job performance, budgetary performance and unit perfor- mance) have been the subject of study. The parallels reveal how dependent we are, as accounting researchers, on the theoretical developments in related disciplines.
Searching the literature
Our search for a research idea will have lead us to the key motivating litera- tures in the area. Keyword searches in relevant databases will have yielded numerous seemingly relevant abstracts, and a smaller number of pivotal papers. We need to drill down further from these papers, and successive papers, by attending to their reference lists and to the references from the references. There is still no easy way to do this because online databases frequently terminate around 1988, making hardcopy journal articles essen- tial, either through library serial holdings or through inter-library loans. The result of such a search will be a great deal of paper, which should disclose:
• those few key papers, the seminal literature in the area, which will moti- vate further research;
• evidence of what we know (i.e., the current boundaries of our knowledge) and, just as important, what we do not yet know, because it still consti- tutes future research (the nature of empirical findings will also show what we are not sure of because of inconsistent or contradictory findings);
• an indication of the theoretical frameworks which are likely to guide future research in the area, and the implications of these for our own research;
• subsequent searches of recently completed theses, conference presenta- tions and working papers, which will reveal both the avenues of research currently being explored (likely two years ahead of publication) and, importantly, those gaps which are still apparent;
• the theories which will indicate the relationships we are able to justify.
The empirical literature will have measured associations to identify those variables that are likely to be influential, which are therefore the leading candidates to appear in our early conceptual models.
More detailed aspects of the literature review are considered in Chapter 9 (with respect to archival searches) and Chapter 10 (with respect to thesis writing).
We began to consider variable definition and measurement issues in Chapter 2, but it is opportune at this stage to return to Figure 2.6 to consider alternative, perhaps more appropriate, configurations for our conceptual schema.
Modelling the relationship
Our fundamental relationship is an association between two variables of interest, with the relationship subject to influence by another group of variables.
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