Can Earnings Fixated Investors Survive in a Competitive Securities Market? Implications for Sustained Price Anomalies and Mark-to-Market Accounting

Posted: 28 Feb 2018

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Guo Ying Luo

McMaster University

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2018

Abstract

We model the dynamic survival of earnings fixated investors in a competitive securities market that allows for learning and arbitrage and that is populated by heterogeneous investors. Our model is distinct from those based on aggressive trading by overconfident investors. We prove that in the absence of noise traders, rational investors will drive out earnings fixated investors from the market in the long-run. More interestingly, we show that in a market with noise traders, some proportion of earnings fixated investors survive in long-run equilibrium for all feasible model parameter values. Furthermore, under no circumstances can the earnings fixated investors be driven out of the market completely. On the contrary, for some parameter values, the earnings fixated investors drive out the rational investors entirely. These results rationalize the long-run sustainability of common pricing anomalies. They also highlight potential benefits to society of mark-to-market accounting.

Keywords: Earnings Fixated Traders; Accounting Conservatism; Survival

JEL Classification: M41; G14

Suggested Citation

Callen, Jeffrey L. and Luo, Guo Ying, Can Earnings Fixated Investors Survive in a Competitive Securities Market? Implications for Sustained Price Anomalies and Mark-to-Market Accounting (February 28, 2018). Journal of Accounting and Public Policy, Forthcoming; Rotman School of Management Working Paper No. 3131539. Available at SSRN: https://ssrn.com/abstract=3131539

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Guo Ying Luo

McMaster University

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905 525 9140 ext. 23983 (Phone)

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