Do the Benefits of Reducing Accounting Complexity Persist in Markets Prone to Bubble?

72 Pages Posted: 14 Sep 2010 Last revised: 27 Sep 2010

See all articles by Jessen L. Hobson

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Date Written: September 13, 2010

Abstract

Standard setters and regulators generally assume that making accounting easier to process leads to more efficient markets, thereby benefiting traders. I test that assumption in markets that are prone to price bubbles. Market efficiency will obtain only if reducing complexity in accounting leads traders to acquire and process that information more readily, and then to trade in a manner that moves price closer to fundamental value. This reasoning implies two causal links - (1) the link from less complex information to greater processing of that information, and (2) the link from greater processing of information to more efficient markets. I test these causal links in an experiment by examining the effect of reducing accounting complexity on market efficiency, as mediated by processing accounting information and as moderated by the market’s propensity to form price bubbles. Traders buy and sell shares of an asset in a multiperiod, double auction market in which speculative capital gains are possible. I find that reducing complexity in information increases processing. However, this processing increases market efficiency only in markets that are less prone to a price bubble. Conversely, in markets more prone to bubble some traders that process information trade according to value, while other informed traders utilize profitable non-value trading strategies that exacerbate price inefficiencies.

Keywords: price bubble, information processing, disclosure complexity, value trading, riding the bubble

JEL Classification: M41, D83, D84, G10, C91

Suggested Citation

Hobson, Jessen L., Do the Benefits of Reducing Accounting Complexity Persist in Markets Prone to Bubble? (September 13, 2010). Available at SSRN: https://ssrn.com/abstract=1676447 or http://dx.doi.org/10.2139/ssrn.1676447

Jessen L. Hobson (Contact Author)

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
247
Abstract Views
1,357
rank
130,449
PlumX Metrics