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Financial reporting and market efficiency with extrapolative investors

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  • Bianchi, Milo
  • Jehiel, Philippe

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.

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  • Bianchi, Milo & Jehiel, Philippe, 2015. "Financial reporting and market efficiency with extrapolative investors," Journal of Economic Theory, Elsevier, vol. 157(C), pages 842-878.
    • Handle: RePEc:eee:jetheo:v:157:y:2015:i:c:p:842-878
    DOI: 10.1016/j.jet.2015.02.009
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    Cited by:

    1. Marianne Andries & Milo Bianchi & Karen Huynh & Sébastien Pouget, 2024. "Return Predictability, Expectations, and Investment: Experimental Evidence," Post-Print hal-04680777, HAL.
    2. Stéphane Gauthier & Guy Laroque, 2022. "Optimal Random Taxation and Redistribution," SciencePo Working papers Main hal-03915336, HAL.
    3. Bianchi, Milo & Jehiel, Philippe, 2020. "Bundlers' dilemmas in financial markets with sampling investors," Theoretical Economics, Econometric Society, vol. 15(2), May.
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    7. Andries, Marianne & Bianchi, Milo & Huynh, Karen & Pouget, Sébastien, 2024. "Return Predictability, Expectations, and Investment: Experimental Evidence," TSE Working Papers 1561, Toulouse School of Economics (TSE).
    8. Ginger Zhe Jin & Michael Luca & Daniel Martin, 2022. "Complex Disclosure," Management Science, INFORMS, vol. 68(5), pages 3236-3261, May.
    9. Mr. M. Awais Mehmood & Dr. Faisal Aftab & Dr. Hafiz Mushtaq, 2016. "Role Of Social Media Marketing (Smm) In Hei’S Admission," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 12(1), pages 12-10.
    10. Syeda Tayyaba Ijaz & Rabia Komal, 2015. "Role Of Hurst Exponent In Prediction Of Market Efficiency In Kse-100 Index," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 11(2), pages 11-14.

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    More about this item

    Keywords

    Extrapolation; Efficient market hypothesis; Competition; Sophistication; Financial reporting;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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