Share Price Formation, Financial Instability and Accounting Design
American Accounting Association Annual Meeting, S. Francisco, August 2010
34 Pages Posted: 10 Nov 2009 Last revised: 5 Jun 2013
Date Written: June 5, 2013
This paper develops a model of share price formation driven by accounting and market structures. Heterogeneous investors are assumed to discover and process fundamental information disclosed by the accounting system. The information set available to share market investors is then jointly composed by market-driven and firm-specific (non-market) information. From one side, the accounting system provides collective signals of fundamental information. From another side, the price system provides collective signals of market-driven information. Both structures are significant for the formation of aggregate share market prices over time. We simulate share price formation under alternative accounting designs (namely, historical cost and fair value accounting), and derive implications and recommendations for the concept and occurrence of speculative bubbles, the cyclical effects of accounting design on share market evolution, and share market allocative efficiencies.
Keywords: accounting information, asset pricing model, fundamentalism, chartism, large fluctuations, market microstructure, historical cost accounting, fair value accounting
JEL Classification: C63, D4, M41, M48, G1
Suggested Citation: Suggested Citation