Accounting Lighthouse in Share Market Dynamics: A Theoretical Model of Share Price Formation with Dual Informational Structure

Preg CRG - Ecole Polytechnique Working Paper

Paris December 2009 Finance International Meeting AFFI - EUROFIDAI

36 Pages Posted: 8 Jun 2009 Last revised: 11 May 2010

See all articles by Yuri Biondi

Yuri Biondi

French National Center for Scientific Research (CNRS)

Pierpaolo Giannoccolo

University of Bologna

Date Written: May 5, 2010

Abstract

The discovery and processing of firm-specific information is expected to play a role in the making of individual expectations and related financial decisions. The information set available to share market investors is then jointly composed by market and firm-specific (non-market) information. From one side, the accounting system provides collective signals of firm-specific information. From another side, the price system provides collective signals of market information. Both institutional devices are significant for the formation of aggregate share market prices over time. In particular, the accounting system complements the price system by constituting a lighthouse in the amazing dynamics of the share market through hazard, learning and interaction between heterogeneous investors. This framework of analysis applies here to provide a theoretical model of share price formation under such dual informational (and institutional) structure. Implications and recommendations are derived for the concept and occurrence of speculative bubbles, the cyclical effects of accounting information on share market evolution, and the "value relevance" of accounting information and its role in the formation of market share prices over time.

Keywords: accounting information, accruals, fair value, historical cost, accounting model, financial efficient market hypothesis, financial bubbles, fundamental analysis

JEL Classification: C09, D02, M48

Suggested Citation

Biondi, Yuri and Giannoccolo, Pierpaolo, Accounting Lighthouse in Share Market Dynamics: A Theoretical Model of Share Price Formation with Dual Informational Structure (May 5, 2010). Preg CRG - Ecole Polytechnique Working Paper; Paris December 2009 Finance International Meeting AFFI - EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=1415602 or http://dx.doi.org/10.2139/ssrn.1415602

Yuri Biondi (Contact Author)

French National Center for Scientific Research (CNRS) ( email )

IRISSO - University Paris Dauphine PSL
Place Marechal Lattre Tassigny
75016 Paris
France

HOME PAGE: http://yuri.biondi.free.fr/

Pierpaolo Giannoccolo

University of Bologna ( email )

Department of Economics
Piazza Scaravilli, 2
40125 Bologna, 40125
Italy

HOME PAGE: http://www2.dse.unibo.it/giannoccolo

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