The 'debt hypothesis' predicts that the larger the firm's debt to equity ratio,the more likely it is that the firm's manager will select accounting procedures that shift reported profits from future periods to current periods - this is to reduce the likelihood of the firm technically breaching its debt covenants.The theory underlying this hypothesis would be a positive theory.

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The statement describes a positive theory, as it predicts behavior based on an economic theory and observable phenomena. The debt hypothesis suggests that managers will behave in a certain way based on their incentives and constraints, which is a key component of positive theories.

The 'Debt Hypothesis' Predicts That the Larger the Firm's Debt