Baseball and the Art of Fair Value: Do Managers or the Prediction Markets Make Better Predictions?

Orly Sade and Emanuel Zur

Chapter 4 in Bridging the GAAP:Recent Advances in Finance and Accounting, 2012, pp 63-92 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe used the popular, interactive, web-based "Wall Street Sports" game, which is a simulation of the exchange market for professional baseball players, to assess who better predicts players' performances: (1) management, measured by player salaries; or (2) the stock market, measured by the Wall Street Sports game prices. We found that the ex ante game price predicts objective measures of a player's performance, value over replacement player (VORP), more accurately than the player's salary. Hence, our results provide evidence that the market has superior predictive ability compared to the management. Our results also show that the game prices' predictive ability is not influenced by the industry, whereas the predictive power of management is significantly influenced by industry-wide considerations. Lastly, we found that stock market prices are better at predicting the players' performance measures towards the end of the season. Our paper joins the prediction markets research, which documents that prediction markets have relatively high predictive ability compared to skilled individuals or surveys. However, to the best of our knowledge, this is the first paper employing field experimental methods of prediction markets to investigate the asymmetric information between the stock market and management using the managers' ex ante evaluations.

Keywords: Finance; Accounting; Fair Value; Asset Prices; Options; Capital Structure; Debt; Inventory; Leverage; Incentive; Specialists; Generally Accepted Accounting Principles (GAAP) (search for similar items in EconPapers)
Date: 2012
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