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Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets

Author

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  • Larry Bensimhon

    (Laboratoire Interdisciplinaire de Rechrche en Sciences de l’Action (LIRSA), Conservatoire National des Arts et Mètiers, France)

  • Yuri Biondi

    (Centre National de la Recherche Scientifique (France) and ESCP Europe (France))

Abstract

We experimentally explore how common knowledge provided by accounting systems affects investors' decision and shapes the formation of security prices over time. We design alternative accounting structures and run experiments in artificial security markets framed by these structures. In sessions where investors receive exogenous accounting information about ultimate earnings, prices converge to the fundamental levels derived from those earnings through backward induction. Accounting plays a role for the market. In sessions where investors receive endogenous accounting information about earnings that are linked to the ongoing clearing price of the security, market price levels and paths become indeterminate and lose earnings anchor; investors tend to form their expectations of future prices by forward, not backward, induction. Accounting plays its role from the market, and loses its relevance in financial decision-making. These laboratory results suggest that accounting information and its overarching structure are important to prevent market exuberance, excess volatility and the formation of financial bubbles. They further have relevant effects on market allocative efficiency, and revenue and wealth distribution among investors.

Suggested Citation

  • Larry Bensimhon & Yuri Biondi, 2013. "Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 3, pages 21-59, December.
    • Handle: RePEc:kob:tjrevi:dec2013:v:3:p:21-59
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    References listed on IDEAS

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    Cited by:

    1. Tang Vicki Wei, 2019. "The Role of Accounting and the Debate between Historical Cost and Fair Value," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 9(1), pages 1-3, March.
    2. Biondi Yuri, 2017. "Accounting for Europe’s Economy and Society: Considerations for Financial Stability, Economic Development and the Public Good," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 7(2), pages 65-77, July.
    3. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.

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    More about this item

    Keywords

    Share Price Bubbles; Market Exuberance; Excess Volatility; Short-term Investors; Backward Induction; Forward Induction; Experimental Financial Markets; Fair Value; Mark-to-Market; Accounting Regime;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G1 - Financial Economics - - General Financial Markets

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