Research is a process of intellectual discovery, which has the potential to transform our knowledge and understanding of the world around us. In this chapter we examine some of the fundamental assumptions upon which research in the nancial disciplines is based. These disciplines, like most others within the social sciences, are methodologically highly diverse. Scholars in these disciplines come from a variety of different backgrounds and sometimes make implicit but different methodological assumptions about the nature of reality, the role of theory and the signi ance of empirical experimentation. Part of our task in this chapter is to make clear what those assumptions are and how they in?uence the research process.
We start our discussions about research at a somewhat abstract level but, as we will demonstrate in later chapters, the issues we raise here condition much of what we have to say later about such questions as: What are the different assumptions about the nature of nancial reality that inform research? What is the role of theory in acquiring knowledge about ancial and accounting reality? How does research progress? Given that research is fundamentally about the discovery, interpretation and communication of new knowledge there is still little agreement about the source of knowledge itself.
The nancial disciplines have, over the last 40 years, provided a new intellectual arena for some very old debates, and our purpose here is to discuss the range of issues and debates, which are of importance to the practising researcher. To illustrate the methodological issues presented by ancial research, consider two studies recently published in the accounting literature. The rst by Maines and McDaniel (2000) is typical of the type of article found in the mainstream US literature and examines the effect of a disclosure requirement on the processing of ? nancial information by investors. This article draws upon prior work in psychology (Hogarth, 1987), which asserts that performance–assessment judgments are formed by individuals from a linear combination of cues. On the basis of this the researchers create two empirical hypotheses, which are tested in Copyright 2009 Cengage Learning.
TRADITIONS OF RESEARCH IN FINANCE AND ACCOUNTING the controlled research environment of 90 Master of Business Administration (MBA) students. Note that the conclusion drawn from an empirical domain of 90 MBA students has been generalized to include all non-professional investors. This type of research is generally called ‘positive’ accounting research in that it claims to give reliable and empirically sustainable answers to questions that policymakers regard to be important.
This type of research is contested by many researchers, not on grounds of method, but because they do not agree with the philosophical premises upon which the research is based. Our second example was recently published in Economy and Society by Froud et al. (2000). This paper addresses the issue of whether maximizing shareholder value results in superior business perfomance. The authors combine a limited but critical review of the literature before presenting a range of evidence (‘empirics on micro performance and the meso limits to shareholder value’) to support their case.
The evidence cited is in the form of a listing of the value-added performance of a range of companies as illustration of a thread of argument drawn from the author’s social and political framework. This research is developed through a lengthy series of natural language arguments (see Chapter 11) containing numerous suppositions and assertions (we use these words in a non-pejorative sense). The paper emphasizes ‘interpretation’ rather than ‘explanation’ or ‘prediction’ when studying social phenomena.
No appeal is made to the use of statistical or other formal method although, as was the case with the st example discussed above, a wide range of generalizations are made in the conclusion to the paper. However, our point is that research of either type, whilst being acceptable in terms of the methods employed, may be subject to hostile and fundamentally noncomprehending criticism because of underlying disputes at the philosophical level. When a piece of research is characterized by poor technique, a critic may argue that the research is ‘defective’, ‘weak’ or ‘misapplied’, however, when a methodological dispute is involved the research is simply labelled as ‘nonsensical’.
Notwithstanding the fundamental nature of the debates that permeate much research in accounting and nance, historically the methodological position adopted by the large majority of active researchers in these disciplines has inclined towards the position exempli? ed by the rst of our examples above. That is, they demonstrate a strong commitment to what we would label ‘objective’ research. By this they view research as a process of constructing precise and economical theories validated by well-designed tests using large and, as far as possible, unbiased samples.
The duality within western thought Research in accounting and nance is generally accepted as being social scienti? , as appropriate standards of scienti? c enquiry are applied to social issues rather than natural phenomena, which is taken to be the domain of the natural sciences and of physics in particular. Many philosophers, such as Bertrand Russell in his History of Western Philosophy, argue that the origins of western thought can be traced back to the Greeks, who in their turn almost certainly drew upon and rationalized ideas from their own social and religious inheritance as well as those other Eastern Mediterranean cultures with which they came in contact.
Possibly the most important idea contributed by the Greeks was that reality could be characterized by opposites and that there is an essential duality in all things. To give two important examples: statements are either true or false (in Aristotelian logic: the Law of Excluded Middle) and each individual is a subject in a ‘subject–object’ relationship with the external world.
Although deeply rooted in our social and cultural heritage, these dualities of thought and understanding do have limitations and have provoked debate within their own terms about the nature of knowledge, truth and reality and, more recently, in terms of their own validity. The Greek perception of opposites endowed western thought with great power, especially when dealing with the natural order or with the development of logic and mathematics. Where they have been less successful is in helping us to gain mastery of our social world where truth and falsity are much more ambiguous concepts and where relationships which are objecti d often cease to be Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
But, it is important to ask what forms these beliefs? One view is that they are formed from the perceptions individuals have about the objects that confront them. But do they perceive objects, or as many philosophers argue, the ‘appearance’ of objects? We can then propose that the appearance of what we observe should be distinguished from the fundamental nature (if such exists) of what we observe. We might also argue that we can come to know things about objects through reason and thus bypass the problem of appearances and perception altogether.
Empiricism and rationalism There are a number of sources of our beliefs (see Audi, 1998): we may perceive objects or events (perceptual belief); we may remember facts (memorial belief), we may come to believe by a process of introspection (introspective belief) or we may come to believe by a process of reason (rational belief). We may come to believe through induction (inductive belief), which is a process of inferring general truths from perceptual and/or memorial belief, and we may also come to believe because of the testimony of others (testimonial belief).
In principal, however, all of these reduce to two distinct sources: rst, that which is grounded within our own rational processes as the enquiring subjects, that is, rational belief, and, second, that which is grounded in the object of our enquiry, that is, perceptual belief. The rst of these two sources of belief (and hence knowledge) assumes that we do not need to look beyond ourselves to form a justi ed true belief about the world. In other words propositional knowledge, that is, knowledge about what is can be known a priori and does not have to be perceived.
This idea can be traced back to Socrates and Plato who argued the existence of abstract forms of knowledge. Socrates believed that all knowledge is innate and the wise teacher could draw that knowledge from others through the use of leading questions. This is the basis of what is often referred to as the ‘Socratic method’ in teaching. His pupil, Plato, extended these ideas and taught that there exists a realm of ideas which contain the essence of things (their form). Platonic ideal forms, as they became known, could include the abstractions of pure geometry at one extreme to the ideal society (the republic) at the other.
Plato believed that these ideal forms were real, in the sense that they had an existence as abstractions independently of any enquiring mind, but that they could be accessed only through the exercise of reason. In this sense Plato was a ‘rationalist’ in that he held that true belief is accessible only through reason. However, he was also a realist (see below) in that he believed that the world of ideal forms had an objective existence. Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
In nance, which takes much of its intellectual basis from economics, the concepts of ideal or perfect markets are Platonic abstractions. If Plato had bothered with perfectly ef cient capital markets (whether this was a side interest of his, history does not record) he would have argued that what he had conceptualized was a real entity, which does not exist in space or time, but which can be understood and re? ected upon by the exercise of reason alone.
Platonic abstraction and its modern variant, rationalism, has proved particularly tenacious in western culture – especially for those who have spent considerable time throughout their education improving their powers of reason (as opposed to their power of observation, for example). A second tradition of thought is derived from Aristotle and is quite different. Aristotle did not accept the arguments of the academicians and entered into a long dispute with Plato, which led to his expulsion from the Academy. Given the dearth of other institutions of learning at the time, Aristotle formed a rival school called the Lyceum in 366 BC .
Aristotle argued that we gather knowledge by observation and categorization, and he challenged the existence of ideal forms. In as far as they do exist, Aristotle saw them as embedded within objects that have a spatio-temporal existence. For example, as we re? ect upon different types of market we note that each has certain characteristics that recur in different situations. Through repeated observation of particulars we begin to form an understanding of the properties of a general class of markets and these general properties, in heir turn, are amenable to logical extension and analysis.
We can nd elements of these two traditions in the writings of St Augustine (354–430) and the thirteenth-century scholastics: St Thomas Aquinas (on the Platonic side) and William of Ockham (on the Aristotelian). However, it was not until the seventeenth and eighteenth centuries that the ideas we now describe as ‘rationalism’ and ‘empiricism’ were fully articulated. ‘Rationalism’ as a term was ? rst used to ? describe the world view of the French philosopher-mathematician Rene Descartes (1596–1650).
However, as a tradition it underpins much of modern continental philosophy and particularly the work of Hegel and Marx. Empiricism, however, became dominant in Britain where the trade guilds and the professions in the seventeenth, eighteenth and nineteenth centuries created a new social milieu. The entrants to these trades were not generally the product of a classical education system, and their expertise relied on the transfer of skills by word of mouth – master to apprentice. In such a system, the educational tradition relied very heavily on the careful observation and practice of what the apprentice observed.
This was also the time of the emergence of the ‘scienti c method’ with its foremost champion, Sir Isaac Newton, harnessing the discipline and observational skills of an alchemist with a formidable theoretical and mathematical ability. Much has been argued and written about the merits and defects of empiricism. Modern empiricists by and large now accept as untenable the idea that knowledge is uniquely determined by experience, but they would claim that experience can represent a justi cation for our beliefs about what we know.
The empiricist position leads quite naturally to the idea that science (natural or social) should be ‘value free’; that is, free from beliefs and ideologies which cannot be justi ed in terms of the objects of experience under study. The in uence of empiricism has been extremely pervasive and has led to one of the most signi cant philosophical movements of modem times: positivism. Positivism is now regarded as rather passe in certain quarters, although it has been particularly in uential in the recent development of the disciplines of nance, economics and accounting.
However, before we consider positivism in detail it is worth while considering two other important and related areas of philosophical debate: to what extent can we be truly objective in the statements we make about the world and to what extent are scienti c beliefs conditioned by or relative to the social context of the researcher Realism versus idealism Empiricism and rationalism is a classical distinction which focuses on the source of knowledge. Realism and idealism are terms used to describe the ontology of what we know. Ontology is the study of existence and in this context is concerned with what we discern to be ‘real’.
Reality is a dif cult concept but is concerned with the construction of existence in objects. The questions we now pose is how do we know what is real and how do we know when statements about the world are true or false. Following the ancient Greeks there are two opposite positions: that of the realists who hold that reality subsists within objects, and that of the idealists who hold that it exists within the mind of the subject. However, the empiricist–rationalist distinction still holds. As we noted before, Plato was a realist in that he believed that his perfect worlds were real but only accessible to reason.
