Does Accounting Measurement Influence Market Efficiency: A Laboratory Market Perspective

45 Pages Posted: 15 Mar 2019 Last revised: 26 Jun 2019

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: June 25, 2019

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 investor perceptions and asset mispricing. Results show that investors perceive otherwise equivalent assets differently by regime. In the mark-to-market regime investors perceive stronger links between performance and market price changes, and also perceive weaker links between performance and asset fundamentals. These perceptions correspond with greater market-level mispricing/bubbles in the mark-to-market regime. In supplemental analysis, we observe that investors in the market-to-market regime prefer information about future market prices but investors in the historical cost regime prefer information about future dividends. 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 (June 25, 2019). 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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