Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets. Accounting for or from the Market?

The Japanese Accounting Review, Vol. 3 (2013), p. 21-59

39 Pages Posted: 27 Sep 2011 Last revised: 20 Jul 2014

See all articles by Larry Bensimhon

Larry Bensimhon

Conservatoire National des Arts et Métiers (CNAM)

Yuri Biondi

French National Center for Scientific Research (CNRS)

Date Written: March 14, 2013

Abstract

We experimentally explore how common knowledge provided by accounting systems affects investors’ decision and shapes the formation of security prices over time. We design alternative accounting structures and run experiments in artificial security markets framed by these structures. In sessions where investors receive exogenous accounting information about ultimate earnings, prices converge to the fundamental levels derived from those earnings through backward induction. Accounting plays a role for the market. In sessions where investors receive endogenous accounting information about earnings that are linked to the ongoing clearing price of the security, market price levels and paths become indeterminate and lose earnings anchor; investors tend to form their expectations of future prices by forward, not backward, induction. Accounting plays its role from the market, and loses its relevance in financial decision-making. These laboratory results suggest that accounting information and its overarching structure are important to prevent market exuberance, excess volatility and the formation of financial bubbles. They further have relevant effects on market allocative efficiency, and revenue and wealth distribution among investors.

Keywords: share price bubbles, market exuberance, excess volatility, short-term investors, backward induction, forward induction, experimental financial markets, fair value, mark-to-market, accounting regime

JEL Classification: G12, C9, D4, M41, M48, G1

Suggested Citation

Bensimhon, Larry and Biondi, Yuri, Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets. Accounting for or from the Market? (March 14, 2013). The Japanese Accounting Review, Vol. 3 (2013), p. 21-59. Available at SSRN: https://ssrn.com/abstract=1934227 or http://dx.doi.org/10.2139/ssrn.1934227

Larry Bensimhon

Conservatoire National des Arts et Métiers (CNAM) ( email )

292, rue Saint-Martin
Paris cedex 03, 75141
France

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/

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