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Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency

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  • Gao, Pingyang

Abstract

This paper examines the market efficiency consequences of accounting disclosure in the context of stock markets as a Keynesian beauty contest, an influential metaphor originally proposed by Keynes (1936) and recently formalized by Allen, Morris, and Shin (2006). In such markets, public information plays an additional commonality role, biasing stock prices away from the consensus fundamental value toward public information. Despite this bias, I demonstrate that provisions of public information always drive stock prices closer to the fundamental value. Hence, as a main source of public information, accounting disclosure enhances market efficiency, and transparency should not be compromised on grounds of the Keynesian-beauty-contest effect.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9480.

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Date of creation: Jun 2007
Date of revision: Oct 2007
Handle: RePEc:pra:mprapa:9480

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Keywords: Keynesian Beauty Contest; Public Information; Coordination; Market Efficiency;

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  1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  2. Guillaume Plantin & Haresh Sapra & Hyun Shin, . "Marking to Market: Panacea or Pandora’s Box ?," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2005-E4, Carnegie Mellon University, Tepper School of Business.
  3. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
  4. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  5. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1553-1583, 08.
  6. Regina M. Anctil & John Dickhaut & Chandra Kanodia & Brian Shapiro, 2004. "Information Transparency and Coordination Failure: Theory and Experiment," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 159-195, 05.
  7. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
  8. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  9. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  10. Beverly R. Walther, 2004. "Discussion of Information Transparency and Coordination Failure: Theory and Experiment," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 197-205, 05.
  11. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(3), pages 221-235, September.
  12. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, American Finance Association, vol. 31(2), pages 573-85, May.
  13. Grossman, Sanford J, 1995. " Dynamic Asset Allocation and the Informational Efficiency of Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 50(3), pages 773-87, July.
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Cited by:
  1. Camille Cornand & Frank Heinemann, 2014. "Measuring agents’ reaction to private and public information in games with strategic complementarities," Experimental Economics, Springer, vol. 17(1), pages 61-77, March.
  2. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 296-343, December.

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