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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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    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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