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Feedback loops, fair value accounting and correlated investments

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  • Robert J. Bloomfield

    (Cornell University)

  • Mark W. Nelson

    (Cornell University)

  • Steven D. Smith

    (University of Illinois at Urbana–Champaign)

Abstract

This paper presents and tests a model of the price dynamics that arise when investors fail to recognize the redundancy of unrealized gains and losses (“UGLs”) that are correlated with the firm’s past returns. Consistent with the predictions of our model, our experiment shows that a firm’s prices and earnings become highly volatile when correlated investment is large and correlated UGLs are made salient by comprehensive income reporting. The results suggest that including correlated UGLs in performance numbers could induce violations of weak-form efficiency that exacerbate volatility in share prices and earnings.

Suggested Citation

  • Robert J. Bloomfield & Mark W. Nelson & Steven D. Smith, 2006. "Feedback loops, fair value accounting and correlated investments," Review of Accounting Studies, Springer, vol. 11(2), pages 377-416, September.
    • Handle: RePEc:spr:reaccs:v:11:y:2006:i:2:d:10.1007_s11142-006-9003-2
    DOI: 10.1007/s11142-006-9003-2
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    References listed on IDEAS

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    Cited by:

    1. Dennis Chambers & Thomas J. Linsmeier & Catherine Shakespeare & Theodore Sougiannis, 2007. "An evaluation of SFAS No. 130 comprehensive income disclosures," Review of Accounting Studies, Springer, vol. 12(4), pages 557-593, December.

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    Keywords

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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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