Why theory is important for scientific investigators and business professionals? Could theorists generate theory from trial and error approach, or a good theory must follow and go beyond specific virtues? Does theory necessarily require application? Do business professionals practice real business problems without theory? Eventually, is there an inevitable connection between theory and research? Theory's precise nature involves a vigorous debate among social scientists, academics, and business professionals, because science embraces empirical research; otherwise, it consists of untested constructs. However, the theme of the debate is embedded in different types of theory and in the scholarly views of what constitutes a good theory. In this paper we present three views on the nature and types of theory, focus on the relationship between theory and research, and identify theoretical directions through which research can contribute to theory. This paper is organized as follow. We begin by discussing literature review on the nature and types of theory and prescribe different opinions on what constitutes a theory. With this background, we then turn to differentiating theory from related concepts, such as hypothesis, paradigm, and model. The literature review section extends to explore the relationship between theory and research. We end the literature review section with discussions of implications of the short-term liquidity theory for measuring firms’ liquidity position and a variety of financial gauges commonly used in financial analysis field. Next we turn to present a discussion and findings section, within which we elucidate and synthesize theory traditions and provides an orientation toward short-term liquidity measurement theory. Finally, we conclude the paper with a set of propositions that summarizes the most significant aspects of theory and theory traditions.
Despite many scholars define theory using different theoretical perspectives, developing an exact definition of a theory spawns the need of a logical identification of what is a good theory? Without such definition, a high degree of uncertainty will surround scientific inquiry processes and managerial decision-making fields. The next section begins by introducing what theory is and demonstrates three different themes on the nature of theory that are rooted in the concept of minitheories, ingredients of a good theory (Gelso, 2006), and positivist and post-positivist knowledge creation paradigms (Stem, 2007; Goduks, 2012).
The academic literature on the definition of theory provides a plethora of definitions and opinions that are driven from different angles and at multiple levels. For example, Gelso (2006) claimed that a theory can be thought of as a statement of a testable relationship that may exist between and among a set of variables associated with a certain phenomenon. According to Stem (2007), a theory is a group of logically organized sentences of a relationship that constitutes a set of observations. In the same vein, Henderikus (as cited in Gay & Weaver, 2011) asserted that observations are theory-laden. In addition, Wacker (1999) provided a detail view of theory, including the elements of a scientific theory. Wacker (1999) also argued that the definition of theory should include four components: definitions, domain, relationships, and predictive claims. Corley and Gioia (2011) situated the definitions provided above when they posited that “theory is a statement of concepts and their interrelationships that shows and/or why a phenomenon occurs” (p. 12). However, one of the primary reasons of these different definitions is that scholars approach a theory from different views (Gelso, 2006; Stam, 2007). In addition, a theory involves different types, including minitheories (Gelso, 2006). Gelso's (2006) research methodology in applying theories to research is structured by several research studies of psychological science, such as therapy and personality theories, and used data analysis and observation approaches for data collection purposes. Gelso (2006) posited the concept of minitheories that tends to be parts of comprehensive theories. According to Gelso (2006), minitheories describe a specific aspect of a broad theory but explain very narrow behaviors of a certain phenomenon. For example, how liquidity ratios theory is constructed? The liquidity ratios theory is often rooted in the concepts established by a grand financial analysis system, but the theory does not seek to explain the broader frame of the short-term liquidity measurement (Kirkham, 2012). Rappaport (2001) presented similar results and argued that economic models are minitheories and constitute global theories in economics. Furthermore, a theory may be also thought of as a coherent set of interlinked ingredients. According to Gelso's (2006) philosophical version of theory, a good scientific theory ought to possess specific ingredients. Gelso (2006) suggested a set of necessary ingredients of a good scientific theory: descriptive ability, explanatory power, heuristic value, testability, integration, parsimony, clarity, comprehensiveness, and delimitation. These parameters constitute interlinked components of a good scientific theory. For example, the descriptive ability and explanatory power components reflect the extent to which good theories have the ability to effectively translate data into quantifiable results that could describe and explain the cause-effect relationship among variables Gelso (2006). In additional to these ingredients, the qualities of a good theory include what tend to be termed heuristic value (Gelso, 2006). Other Gelso's (2006) suggested ingredients of a good theory are collectively indicated that theories stimulate research that contains a precise problem statement, purposes, questions, and testable propositions and constructs, in which the inherent connection between theory and research becomes a profound and inevitable. Furthermore, central to logical positivist philosophy of science that holds another position of theories, as empirically interpreted deductive and axiomatic system is called the received view (Stam, 2007). The received view attributes a scientific theory to a set of propositions that generate logical empirical facts (Stam, 2007). According to Stam (2007), the received view involves a reductionism approach, through which the goal of knowledge is simply describing what positivists can observe and measure. Such a position requires the rejection of metaphysics (Goduka, 2012). One implication that can be drawn from the reductionism approach is that because researchers can not directly observe emotions, personality characteristics, etc. these attributes were not justifiable topics for a scientific research (Goduka, 2012). Another consequence of the reductionism approach is the need to understand the part of the whole to understand the whole (Shepherd & Sutcliffe, 2011). For instance, a researcher who measures to what extent is there a correlation between liquidity ratios and operating cash flow ratios in measuring a firm's liquidity position can not rely solely upon key dependent and independent variables; instead, the researcher needs to employ multiple variables that must be organized in a correlation analysis design. In contrast, where the positivist believed that the goal of science is to describe what we can observe and measure, the post-positivist believes that all observations are theory-laden (Goduka, 2012 & Stem, 2007). However, theory-building is not so much a single discipline. The discussion should be extended to explain views of what constitutes a theory and the different assumptions governing theory generation.
Although there is little agreement and a lack of consensus on exactly what theory is, the academic literature includes a plethora of views and different opinions on what constitutes a theory. However, the idea of what constitutes a theory rests primarily on the theory’s ability to provide original and practical-oriented insights about a certain phenomenon by disciplinarily advancing or challenging existing knowledge (Corley & Gioia, 2011). The focus here will be primarily on three views of what constitutes a theory; theory contains originality and utility dimensions, theory serves certain functions, and theory as a list of virtues and criteria.
How does a research generate an original contribution to the body of knowledge in a particular discipline? How does the research demonstrate the application of relevant theory and explain how the theory is applied? Hence, originality and utility are two critical dimensions in theory building. Corley and Gioia (2011) explored what is a theory and what constitutes a theoretical contribution. Corley and Gioia (2011) provided a descriptive study that involves two-fold objectives. First, to extrapolate dimensions that characterizes a theoretical contribution in organization and management studies; Second, to establish a connection between real-life practice and theoretical knowledge generation. For the purpose of synthesizing literature on what constitutes a theoretical contribution, Corley and Gioia (2011) gathered and sorted data from Academy of Management Review’s (AMR) best articles published and most cited during the period 1990-2008. The findings of the study showed that research contributes to theory bi-dimensionally: originality and utility. According to Corley and Gioia (2011), the dimension of originality must have the potential to either generate new theoretical insights or extend existing knowledge of a scientific discipline, whereas the utility dimension relates to a theory’s ability to deal with a real-life problem, or as Lewin said (as cited in Corley and Gioia, 2011, p. 16) “nothing is quite so practical as a good theory”.
Given how phenomena work and inform practices are what a theory seeks to provide, a theory should serve certain functions. According to Gelso (2006), Rychlak flagged four functions through which a theory can be viewed: “descriptive, delimiting, generative, and integrative” (p. 2). These four components are examples of theoretical functions that ought to constitute a theory. For instance, the descriptive function explains the causal explanation of a phenomenon. The delimiting function places boundaries on what should be examined, whereas the generative function poses a heuristic value for further research. Eventually, the integrative function seeks to provide a coherent and unified set of propositions and to constructs a consistent theoretical framework (Gelso, 2006).
Furthermore, Wacker's (1999) descriptive study contributes to a putative cumulative body of psychological knowledge, and more specifically to a theory generation. Wacker (1999) cited and synthesized several literatures to support his assertions about theory-building methods and to serve as the foundation upon which the study is built. Operations management theory-builders were the individual demographic of the study participants. Wacker (1999) postulated a set of virtues and criteria for establishing a good theory that include: uniqueness, conservatism, generalizability, fecundity, testability, parsimony, internal consistency, empirical riskiness, and abstraction. Other scholars advocate that a theory explains why a phenomenon occurs by investigating a set of concepts and their interrelationships (Gorley & Gioia, 2011). However, Wacker (1999) classified theory-building research types into two major categories that includes analytical and empirical research methods and further divides them into six sub-categories. The purposes of this analytical and empirical taxonomy are to demonstrate different types of research methodologies and to differentiate between abstraction and empirical levels of theory. Collectively, Wacker (1999) ties what constitutes a good theory to the four definitional components of theory and to an extensive set of virtues of good theory.
Besides aforementioned characteristics, types, and approaches of generating a theory, it might be insightful to distinguish theory from related concepts, such as hypothesis, paradigm, model, and concept. According to Gelso (2006), hypotheses are embedded in theories and could be developed by a researcher to identify the average difference between each sample value and the hypothesized test value. Gelso (2006) also claimed that a hypothesis is a proposition that can be empirically tested. Sparrowe and Mayer (2011) argued that a hypothesis is a logical connection between a dependent variable and an independent variable of a certain relationship that constitutes the central tenor of an established theory or theoretical framework. In addition, theory differs from paradigm. A paradigm is a set of beliefs of viewing the phenomenal world and can be viewed as a gestalt of an idea (Gay & Weaver, 2011). As for models, Colquitt and Zapata (2007) noted that models can be used to linchpin the suspected relationship between and among variables that underlie a theory. Thus, the use of models, such as hypothesis-testing model, in scientific research is intended to illustrate relationships within a theory. A theory, in contrast, is a set of concepts or constructs, definitions of variables, a domain, suspected relationships and predictive claims (Wacker, 1999). Even though theory differs from related concepts described above, theory and research are in constant interaction, and generations in one may lead to generations in other.
The scholarly literature on the relationship between theory and research and the ways research can contribute to theory shows a strong reciprocally association that exists between theory and research. On one hand, a research contributes to theory’s explanatory power by building and enriching the reasons behind the theory and permits researchers to generate an original contribution to the applicable body of knowledge. On the other extreme, theory plays an important role in research processes, including theoretical framework development, by providing theoretical models that guide various phases of scientific inquiry that would not only evaluate and explain why phenomena occur but also predict them (Chuy et al., 2010). According to Gelso (2006), the rapport that exists between theory and research takes the form of a scientific work cycle. This cycle can be embedded in a context of discovery and a context of testing. In the context of discovery a researcher develops or rejuvenates a construct that underlies an observation and applies empirical investigation that armed with specific theories to explaining the occurrence of the idea being investigated. Hence, the researcher engages with the context of testing. In this context, the researcher identifies the theoretical approach that will be tested, the methods by which the data will be gathered and analyzed. Based on the theories used and empirical evidence gathered during the research process, the researcher concludes the findings and reveals inadequacies in the constructs and measures that require a return to the context of discovery for further investigation (Gelso, 2006 & Harlow, 2009).
The relationship between theory and research can be extended to explain the ways research designs, whether qualitative or quantitative, can be used to develop a theory. Researchers who use qualitative research strategies employ case study methods to understand phenomena in context-specific settings. Harlow (2009) emphasized on the role of case study researches through which original research contribution leads to theory generation. Harlow (2009) described two case studies to exemplify the way in which case study research aims to generate theory. In the first case, 37 individuals who possess different demographics have been interviewed to examine their fear of crime reaction. According to Harlow (2009), the researchers of this study concluded that the fear of crime does not necessarily depend on individuals' social characteristics; instead, people interpret information differently regardless of their demographic settings. In addition, the study's findings spawned incremental developments to the level of knowledge on the fear of crime in the United Kingdom by providing a new theoretical base on the fear of crime phenomenon. According to Harlow (2009), the authors of the second case employed qualitative data research methodology on an Indian multinational organization that is operated by centralized management and decentralized subsidiaries. The aim of the study was to examine the extent to which centralized team members and decentralized staff might perceive the implementation of a new management strategy differently. The findings of the study provided important information in organizational structure and business strategy development by providing original insight in a way that is deemed to build a new theory. Eventually, Harlow (2009) concluded that conducting a case study research leads to empirical insights that contribute to the development of a theory. In contrast to quantitative methods of inquiry, hypothesis-testing research contributes to theory bi-dimensionally: null and alternative hypothesis. When researchers conduct a quantitative research, they are inevitably attempting to answer a hypothesis and ought to set out the null and alternative hypothesis. According to Sparrowe and Mayer (2011), by rejecting the null hypothesis, researchers empirically establish a co-relationship that may exist between the dependent and independent variables, which in turn provides a theory that is empirically informed.