The 'debt/equity hypothesis' of Positive Accounting Theory predicts which of the following?
A) The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that lower income.
B) The lower the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase income.
C) The higher the firm's debt/equity ratio, the more likely managers are to use accounting methods that increase income.
D) None of the given options are correct.

Question

Quizplus · Accepted Answer

The 'debt/equity hypothesis' of Positive Accounting Theory suggests that firms with higher debt/equity ratios are more likely to adopt accounting methods that increase reported income. This is because higher income figures can make the firm appear more financially stable, potentially easing the concerns of creditors and reducing the costs associated with debt.

The 'Debt/equity Hypothesis' of Positive Accounting Theory Predicts Which of the Following