Does Accounting Measurement Influence Market Efficiency: A Laboratory Market Perspective

58 Pages Posted: 15 Mar 2019 Last revised: 15 Apr 2020

See all articles by Nigel J. Barradale

Nigel J. Barradale

Barradale Asset Management

Brian M. Goodson

Clemson University

Matthew Sooy

Richard Ivey School of Business - University of Western Ontario

Date Written: April 15, 2020

Abstract

Using laboratory markets where accounting regimes can be directly compared with equivalent economic parameters, we test whether and how two different accounting measurement bases – historical cost and mark-to-market – influence trader perceptions and asset mispricing. Across three experiments, our results show that traders perceive otherwise equivalent assets differently by regime. In the mark-to-market regime traders perceive stronger links between performance and market price changes, and weaker links between performance and asset fundamentals. We also observe that traders in the mark-to-market regime prefer information about future market prices but traders in the historical cost regime prefer information about future dividends. These perceptions correspond with greater market-level mispricing/bubbles in the mark-to-market regime. Our results suggest that accounting regimes can, on their own, contribute to price bubbles and their subsequent collapse.

Keywords: Fair value, Price bubbles, Experimental markets, Measurement regime, Mark-to-market, Historical cost

JEL Classification: G28, G41, M41

Suggested Citation

Barradale, Nigel J. and Goodson, Brian Matthew and Sooy, Matthew Thomas, Does Accounting Measurement Influence Market Efficiency: A Laboratory Market Perspective (April 15, 2020). Available at SSRN: https://ssrn.com/abstract=3339949 or http://dx.doi.org/10.2139/ssrn.3339949

Nigel J. Barradale

Barradale Asset Management ( email )

United States

Brian Matthew Goodson

Clemson University ( email )

Clemson, SC 29631
United States

Matthew Thomas Sooy (Contact Author)

Richard Ivey School of Business - University of Western Ontario ( email )

London, Ontario
Canada

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