Financial reporting and market efficiency with extrapolative investors

Milo Bianchi and Philippe Jehiel ()

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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: Financial reporting; Extrapolation; Efficient market hypothesis; Competition; Sophistication (search for similar items in EconPapers)
Date: 2015-05
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Citations: View citations in EconPapers (12)

Published in Journal of Economic Theory, 2015, 157, pp.842-878. ⟨10.1016/j.jet.2015.02.009⟩

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Journal Article: 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:hal:journl:halshs-01156413

DOI: 10.1016/j.jet.2015.02.009

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