Financial reporting and market efficiency with extrapolative investors

Milo Bianchi and Philippe Jehiel ()

Journal of Economic Theory, 2015, vol. 157, issue C, 842-878

Abstract: We model a financial market in which companies engage in strategic financial reporting knowing that investors only pay attention to a randomly drawn sample from firms' reports and extrapolate from this sample. We investigate the extent to which stock prices differ from the fundamental values, assuming that companies must report all their activities but are otherwise free to disaggregate their reports as they wish. We show that no matter how large the samples considered by investors are, a monopolist can induce a price of its stock bounded away from the fundamental. Besides, increasing the number of companies competing to attract investors may exacerbate the mispricing of stocks.

Keywords: Extrapolation; Efficient market hypothesis; Competition; Sophistication; Financial reporting (search for similar items in EconPapers)
JEL-codes: C72 D53 G14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Financial reporting and market efficiency with extrapolative investors (2015)
Working Paper: Financial reporting and market efficiency with extrapolative investors (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:157:y:2015:i:c:p:842-878

DOI: 10.1016/j.jet.2015.02.009

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