Positive Accounting Theory

Positive Accounting Theory (PAT) is a framework that explains and predicts how companies choose accounting methods and how managers act based on their interests and incentives. It assumes that companies and managers prefer ways to influence their reported financial results to benefit themselves, such as maximizing stock prices or reducing taxes. PAT analyzes these choices as logical responses to economic and contractual circumstances, rather than prescribing how companies should report their finances. Essentially, it seeks to understand, rather than regulate, the actual behaviors and decisions involved in financial reporting.