Financial Reporting and Market Efficiency With Extrapolative Investors

61 Pages Posted: 15 Nov 2019

See all articles by Milo Bianchi

Milo Bianchi

University of Toulouse 1 - Toulouse School of Economics (TSE)

Philippe Jehiel

University College London - Department of Economics; Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

Date Written: February 7, 2015

Abstract

We model a financial market in which companies engage in strategic financial reporting knowing that investors only pay attention to a randomly drawn sample from firms' reports and extrapolate from this sample. We investigate the extent to which stock prices differ from the fundamental values, assuming that companies must report all their activities but are otherwise free to disaggregate their reports as they wish. We show that no matter how large the samples considered by investors are, a monopolist can induce a price of its stock bounded away from the fundamental. Besides, increasing the number of companies competing to attract investors may exacerbate the mispricing of stocks.

Keywords: extrapolation, efficient market hypothesis, competition, sophistication, financial reporting

JEL Classification: C72, D53, G14

Suggested Citation

Bianchi, Milo and Jehiel, Philippe, Financial Reporting and Market Efficiency With Extrapolative Investors (February 7, 2015). Journal of Economic Theory, 2015. Available at SSRN: https://ssrn.com/abstract=3482345

Milo Bianchi (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Philippe Jehiel

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2873 (Phone)
+33 1 4458 2880 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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