Financial reporting and market efficiency with extrapolative investors
Bianchi, Milo; Jehiel, Philippe (2015), Financial reporting and market efficiency with extrapolative investors, Journal of Economic Theory, 157, p. 842-878. 10.1016/j.jet.2015.02.009
TypeArticle accepté pour publication ou publié
Journal nameJournal of Economic Theory
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Abstract (EN)We consider a competitive financial market in which companies engage in strategic financial reporting knowing that investors only payattention to finitely many aspects of firms reports and extrapolate from their sample. We investigate the extent to which stock prices differ from the fundamental values, assuming that companies must reportall their activities but are otherwise free to disaggregate their reportsas they wish. We show that no matter how many aspects investors are able to consider, a monopolist can induce a price of its stock bounded away from the fundamental. Besides, competition between companies may exacerbate stock mispricing.
Subjects / Keywordscompetition; efficient market hypothesis; financial reporting; sophistication; Extrapolation
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