Political Costs and Accounting Method Choice: The Pharmaceutical Industry

This study examines the validity of positive accounting research by calculating the net income effect of accounting and managerial choices within the pharmaceutical industry. The overall results support the positive accounting theory. The accounting choices of larger firms showed a net negative income effect. In contrast, the accounting choices of smaller firms had a less net negative or even a net positive effect. The political variables specific to the industry, with the exception of 2, were all significant in the hypothesized direction. When the 3 significant political variables were linearly combined using factor analysis, the resulting political factor was highly significant in explaining the effect of accounting and managerial choices.