Can Earnings Fixated Investors Survive in a Competitive Securities Market? Implications for Sustained Price Anomalies and Mark-to-Market Accounting
Jeffrey L. Callen
University of Toronto - Rotman School of Management
Guo Ying Luo
November 15, 2011
CAAA Annual Conference 2012
We model the dynamic survival of earnings fixated investors in a competitive securities market that allows for learning and arbitrage and that is populated by heterogeneous investors. Our model is distinct from those based on aggressive trading by overconfident investors. We prove that in the absence of noise traders, rational investors will drive out earnings fixated investors from the market in the long-run. More interestingly, we show that in a market with noise traders, some proportion of earnings fixated investors survive in long-run equilibrium for all feasible model parameter values. Furthermore, under no circumstances can the earnings fixated investors be driven out of the market completely. On the contrary, for some parameter values, the earnings fixated investors drive out the rational investors entirely. These results rationalize the long-run sustainability of common pricing anomalies. They also highlight potential benefits to society of mark-to-market accounting.
Number of Pages in PDF File: 32
Keywords: earning fixated investors, accounting conservatism, mark to market, survival, evolutionworking papers series
Date posted: January 14, 2012
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