Implications for Users of Financial Statements
4 Theory and hypotheses development
4.1 Theoretical foundation This study is classified into the theoretical scientific concept of the critical rationalism. Under this approach, an empirical research strategy is used in a way to develop hypotheses based on theory and prior research to either confirm or reject the hypotheses against em- pirical data. As related literature has already been reviewed, this chapter presents the rele- vant theory for the development of the hypotheses necessary for the two empirical studies. First, the theoretical approach of the agency theory is presented. Second, the chapter pre- sents the theory of efficient markets as this approach is necessary to explain why financial analysts’ forecasts may be beneficial for investors. 4.1.1 Agency theory 18.104.22.168 Agency theory as a part of the new institutionalism The new institutionalism is based on neoclassical economics but does not require the simplified and easy-to refute assumptions.111 Therefore, the new institutionalism appears to be closer to transactions as they are likely to occur in reality. The new institutionalism does not assume a perfectly competitive capital market with complete information availa- ble to every trader and free access to the financial market with trading at no cost and in particular accounts for asymmetric information in the market and transaction costs. How- ever, when the assumptions of the neoclassical economics do no longer hold under the new institutionalism, the results of perfectly functioning markets that result from neoclas- sical economics cannot longer be valid (Schmidt/Terberger (2006), p. 399ff.). It is then more likely to think of certain friction...
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