Abstract

http://ssrn.com/abstract=285824
 
 

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Market Efficiency, Bounded Rationality, and Supplemental Business Reporting Disclosures


J. Richard Dietrich


Ohio State University

Steven J. Kachelmeier


University of Texas at Austin - Department of Accounting

Don N. Kleinmuntz


affiliation not provided to SSRN

Thomas J. Linsmeier


Financial Accounting Standards Board


Journal of Accounting Research, Vol. 39, No. 2, pp. 243-268, September 2001

Abstract:     
The AICPA Special Committee on Financial Reporting has urged disclosure of relevant forward-looking information on risks and opportunities to supplement conventional financial statements. We conduct a laboratory market experiment to assess the effects of such disclosures on capital allocation decisions. We develop two sets of competing hypotheses regarding how capital markets react to supplemental disclosures. One set is based on the assumption of semi-strong market efficiency, while the other posits that the bounded rationality of individual traders leads to inefficient market prices. We find that explicit disclosure of management's best estimate of an uncertain quantity improves market efficiency, even though this disclosure is redundant with information in financial statements. Second, we find disclosure of an upper bound of management's estimate has the potential to bias security prices upward, while informationally equivalent disclosure of both upper and lower bounds removes this bias. These results suggest that experimental market reactions to these supplemental disclosures are inconsistent with market efficiency. Supplemental analyses of individuals' price predictions and trading behavior support our conclusion that inefficiencies are at least partially attributable to individual information processing biases.

JEL Classification: M41, M45, G12, G14, C91

Accepted Paper Series





Not Available For Download

Date posted: November 13, 2001  

Suggested Citation

Dietrich, J. Richard and Kachelmeier, Steven J. and Kleinmuntz, Don N. and Linsmeier, Thomas J., Market Efficiency, Bounded Rationality, and Supplemental Business Reporting Disclosures. Journal of Accounting Research, Vol. 39, No. 2, pp. 243-268, September 2001. Available at SSRN: http://ssrn.com/abstract=285824

Contact Information

J. Richard Dietrich (Contact Author)
Ohio State University ( email )
2100 Neil Avenue
Dept of Accounting & MIS
Columbus, OH 43210
United States
(614) 292-2082 (Phone)
(614) 292-2118 (Fax)

Steven J. Kachelmeier
University of Texas at Austin - Department of Accounting ( email )
Austin, TX 78712
United States
512-471-3517 (Phone)
512-471-3904 (Fax)
Don N. Kleinmuntz
affiliation not provided to SSRN
Thomas J. Linsmeier
Financial Accounting Standards Board ( email )
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
United States
203-956-5208 (Phone)
203-847-6030 (Fax)
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