Share Price Formation, Market Exuberance and Accounting Design

Banque de France Foundation Research Seminar, November 23, 2010

34 Pages Posted: 11 Oct 2010 Last revised: 6 Jun 2013

Yuri Biondi

French National Center for Scientific Research (CNRS)

Pierpaolo Giannoccolo

University of Bologna

Date Written: June 5, 2013

Abstract

This paper develops a theoretical analysis of share market price formation driven by accounting and market structures. Interacting heterogeneous investors are assumed to discover and process fundamental information disclosed by accounting system of share-issuing entity. Information set available to share market investors for decision-making comprises then market-driven and firm-specific (non-market) information. From one side, accounting system provides collective signal of fundamental information; from another side, price system provides collective signal of market-driven information over time. Both jointly drive the formation of aggregate share market prices through limited knowledge, hazard, and social interaction. Numerical simulations are provided under alternative accounting regimes (namely, historical cost and fair value accounting regimes), to derive implications and recommendations for the concept and occurrence of speculative bubbles and herd behavior; the cyclical effects of accounting regime on share market price dynamics; and the "value relevance" of accounting information and its role in the formation of share market prices over time.

This numerical statistical analysis contributes to shed light on financial stability, market exuberance, accruals accounting anomalies and fundamental analysis.

Keywords: accounting information, asset pricing model, fundamentalism, chartism, large fluctuations, market exuberance, market microstructure, historical cost accounting, fair value accounting

JEL Classification: C63, D4, E17, E37, G17, M41, M48, G1

Suggested Citation

Biondi, Yuri and Giannoccolo, Pierpaolo, Share Price Formation, Market Exuberance and Accounting Design (June 5, 2013). Banque de France Foundation Research Seminar, November 23, 2010. Available at SSRN: https://ssrn.com/abstract=1690398 or http://dx.doi.org/10.2139/ssrn.1690398

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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