POSITIVE ACCOUNTING THEORY, POLITICAL COSTS AND

SOCIAL DISCLOSURE ANALYSES: A CRITICAL LOOK*

Markus J. Milne
Accountancy and Business Law
University of Otago
Dunedin
New Zealand
Ph: 64-3-479-8120
Fax: 64-3-479-8450
Email: mmilne@commerce.otago.ac.nz

* TheauthorwouldliketothankAlanMacGregor,CarolynStringer,GregoryLiyanararchchi,RosWhiting and an
anonymous conference reviewer for their helpful comments on earlier drafts of this paper. Thanks are also
due to seminar participants from the Department of Accounting and Finance, University of Aberdeen,
Scotland, and to conference participants at the 2001 BAA Annual Conference at the University of
Nottingham.

POSITIVE ACCOUNTING THEORY, POLITICAL COSTS AND

SOCIAL DISCLOSURE ANALYSES: A CRITICAL LOOK

Abstract
This paper critically reviews the literature seeking to establish evidence for a positive accounting
theory of corporate social disclosures. It 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 selfinterested politicians pursuing wealth transfers in the form of taxes, regulations and other political
costs. Watts and Zimmermans 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 maximising. 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.
Keywords
Positive Accounting Theory, Political Costs, Social Disclosures, Watts and Zimmerman, Advocacy
Advertising.

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