IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v39y2015icp186-195.html
   My bibliography  Save this article

Truth and financial economics: A review and assessment

Author

Listed:
  • Andrikopoulos, Andreas

Abstract

Truth is important in the theory and practice of finance. Asset valuation is based on models that calculate true asset values as distinct from observed market prices. In financial economics, truth is essential in theoretical and empirical work in market microstructure, corporate finance and asset pricing. The versatile use of “true values” in finance is reviewed and assessed in the context of those philosophical theories of truth which are most relevant to asset pricing debates: the correspondence theory of truth, the coherence theory as well as the pragmatist approach to truth. We find that truth, in asset valuation, is not external to the context of inquiry; it is always model-dependent. This finding motivates the argument that (the truth of propositions about a) theory-independent reality should be explored on the level of structures that trigger market outcomes, rather than the level of asset values. Our findings on the context-dependent character of true asset values also necessitate the exploration of the structure of scientific inquiry in which some contexts prevail over others and some valuation models are widely adopted as measures of truth.

Suggested Citation

  • Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    • Handle: RePEc:eee:finana:v:39:y:2015:i:c:p:186-195
    DOI: 10.1016/j.irfa.2014.12.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521914001963
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2014.12.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chowdhry, Bhagwan & Nanda, Vikram, 1996. "Stabilization, Syndication, and Pricing of IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(1), pages 25-42, March.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Claessens, Stijn & Feijen, Erik & Laeven, Luc, 2008. "Political connections and preferential access to finance: The role of campaign contributions," Journal of Financial Economics, Elsevier, vol. 88(3), pages 554-580, June.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Richard C. Green & Dan Li & Norman Schürhoff, 2010. "Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?," Journal of Finance, American Finance Association, vol. 65(5), pages 1669-1702, October.
    6. Hsieh, Jim & Lyandres, Evgeny & Zhdanov, Alexei, 2011. "A Theory of Merger-Driven IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(5), pages 1367-1405, October.
    7. Boot, Arnoud W A & Thakor, Anjan V, 1993. "Security Design," Journal of Finance, American Finance Association, vol. 48(4), pages 1349-1378, September.
    8. Ľuboš Pástor & Meenakshi Sinha & Bhaskaran Swaminathan, 2008. "Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital," Journal of Finance, American Finance Association, vol. 63(6), pages 2859-2897, December.
    9. Dimitri Vayanos & Jiang Wang, 2012. "Liquidity and Asset Returns Under Asymmetric Information and Imperfect Competition," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1339-1365.
    10. Lamoureux, Christopher G & Schnitzlein, Charles R, 1997. "When It's Not the Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market," Journal of Finance, American Finance Association, vol. 52(2), pages 683-712, June.
    11. Warr, Richard S. & Elliott, William B. & Koëter-Kant, Johanna & Öztekin, Özde, 2012. "Equity Mispricing and Leverage Adjustment Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(3), pages 589-616, June.
    12. Malcolm Rutherford, 1981. "Clarence Ayres and the Instrumental Theory of Value," Journal of Economic Issues, Taylor & Francis Journals, vol. 15(3), pages 657-673, September.
    13. Bruce K. Gouldey, 2006. "Uncertain Demand, Heterogeneous Expectations, and Unintentional IPO Underpricing," The Financial Review, Eastern Finance Association, vol. 41(1), pages 33-54, February.
    14. Talmor, Eli, 1981. "Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 413-435, November.
    15. repec:bla:jfinan:v:59:y:2004:i:1:p:1-30 is not listed on IDEAS
    16. Kenneth A. Kim & Jungsoo Park, 2010. "Why Do Price Limits Exist in Stock Markets? A Manipulation†Based Explanation," European Financial Management, European Financial Management Association, vol. 16(2), pages 296-318, March.
    17. John D. Finnerty, 2013. "The Impact of Stock Transfer Restrictions on the Private Placement Discount," Financial Management, Financial Management Association International, vol. 42(3), pages 575-609, September.
    18. Doukas, John A. & Kim, Chansog (Francis) & Pantzalis, Christos, 2010. "Arbitrage Risk and Stock Mispricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(4), pages 907-934, August.
    19. Matteo Maggiori, 2017. "Financial Intermediation, International Risk Sharing, and Reserve Currencies," American Economic Review, American Economic Association, vol. 107(10), pages 3038-3071, October.
    20. Franҫois Derrien, 2005. "IPO Pricing in “Hot” Market Conditions: Who Leaves Money on the Table?," Journal of Finance, American Finance Association, vol. 60(1), pages 487-521, February.
    21. Venkat R. Eleswarapu & Kumar Venkataraman, 2006. "The Impact of Legal and Political Institutions on Equity Trading Costs: A Cross-Country Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1081-1111.
    22. Qi, Yaxuan & Roth, Lukas & Wald, John K., 2010. "Political rights and the cost of debt," Journal of Financial Economics, Elsevier, vol. 95(2), pages 202-226, February.
    23. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, February.
    24. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    25. Malinova, Katya & Park, Andreas, 2010. "Trading Volume in Dealer Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(6), pages 1447-1484, December.
    26. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-529.
    27. Richard W. Sias, 2004. "Institutional Herding," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    28. Andreas Andrikopoulos, 2013. "Financial economics: objects and methods of science," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(1), pages 35-55.
    29. J. Barry Lin & Christos Pantzalis & Jung Chul Park, 2010. "Corporate Hedging Policy and Equity Mispricing," The Financial Review, Eastern Finance Association, vol. 45(3), pages 803-824, August.
    30. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    31. Kim, Sei-Wan & Krausz, Joshua & Nam, Kiseok, 2013. "Revisiting asset pricing under habit formation in an overlapping-generations economy," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 132-138.
    32. repec:bla:jfinan:v:59:y:2004:i:6:p:2903-2958 is not listed on IDEAS
    33. Millon, Marcia H & Thakor, Anjan V, 1985. "Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Journal of Finance, American Finance Association, vol. 40(5), pages 1403-1422, December.
    34. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    35. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    36. Patricia Chelley‐Steeley, 2005. "Noise and the Trading Mechanism: the Case of SETS," European Financial Management, European Financial Management Association, vol. 11(3), pages 387-424, June.
    37. Thomas H. Noe & Michael J. Rebello & Jun Wang, 2003. "Corporate Financing: An Artificial Agent‐based Analysis," Journal of Finance, American Finance Association, vol. 58(3), pages 943-973, June.
    38. George, Thomas J. & Hwang, Chuan-Yang, 1995. "Transitory Price Changes and Price-Limit Rules: Evidence from the Tokyo Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(2), pages 313-327, June.
    39. Colin Mayer, 2008. "Trust in Financial Markets," European Financial Management, European Financial Management Association, vol. 14(4), pages 617-632, September.
    40. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    41. Easley, David & O'Hara, Maureen, 1992. "Adverse Selection and Large Trade Volume: The Implications for Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(2), pages 185-208, June.
    42. Shih‐Chuan Tsai, 2008. "Information Asymmetry and Corporate Investment Decisions: A Dynamic Approach," The Financial Review, Eastern Finance Association, vol. 43(2), pages 241-271, May.
    43. Donald MacKenzie, 2006. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134608, December.
    44. McGoun, Elton G., 1992. "On knowledge of finance," International Review of Financial Analysis, Elsevier, vol. 1(3), pages 161-177.
    45. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
    46. Carlin, Bruce Ian & Dorobantu, Florin & Viswanathan, S., 2009. "Public trust, the law, and financial investment," Journal of Financial Economics, Elsevier, vol. 92(3), pages 321-341, June.
    47. Narayanan, M. P., 1996. "Form of Compensation and Managerial Decision Horizon," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(4), pages 467-491, December.
    48. Viswanath, P. V., 1993. "Strategic Considerations, the Pecking Order Hypothesis, and Market Reactions to Equity Financing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 213-234, June.
    49. Baron, David P, 1983. "Tender Offers and Management Resistance," Journal of Finance, American Finance Association, vol. 38(2), pages 331-343, May.
    50. Goswami, Gautam & Noe, Thomas H & Rebello, Michael J, 1995. "Debt Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 50(2), pages 633-659, June.
    51. François Derrien, 2005. "IPO Pricing in 'Hot' Market Conditions: Who Leaves Money on the Table?," Post-Print hal-00480827, HAL.
    52. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    53. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    54. Heinkel, Robert, 1982. "A Theory of Capital Structure Relevance under Imperfect Information," Journal of Finance, American Finance Association, vol. 37(5), pages 1141-1150, December.
    55. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 5-35.
    56. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    57. Xavier De Scheemaekere, 2006. "The epistemology of modern finance," Working Papers CEB 06-017.RS, ULB -- Universite Libre de Bruxelles.
    58. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
    59. Puri, Manju, 1999. "Commercial banks as underwriters: implications for the going public process," Journal of Financial Economics, Elsevier, vol. 54(2), pages 133-163, October.
    60. Paul Oyer, 2008. "The Making of an Investment Banker: Stock Market Shocks, Career Choice, and Lifetime Income," Journal of Finance, American Finance Association, vol. 63(6), pages 2601-2628, December.
    61. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    62. Nachman, David C & Noe, Thomas H, 1994. "Optimal Design of Securities under Asymmetric Information," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 1-44.
    63. Shefrin, Hersh & Statman, Meir, 1994. "Behavioral Capital Asset Pricing Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(3), pages 323-349, September.
    64. Xavier De Scheemaekere, 2009. "The epistemology of modern finance," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 2(2), pages 99-120, May.
    65. Jones, Charles P & Litzenberger, Robert H, 1970. "Qtrly Earnings Reports and Intermediate Stock Price Trends," Journal of Finance, American Finance Association, vol. 25(1), pages 143-148, March.
    66. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
    67. Charles M. C. Lee & James Myers & Bhaskaran Swaminathan, 1999. "What is the Intrinsic Value of the Dow?," Journal of Finance, American Finance Association, vol. 54(5), pages 1693-1741, October.
    68. Nyborg, Kjell G. & Sundaresan, Suresh, 1996. "Discriminatory versus uniform Treasury auctions: Evidence from when-issued transactions," Journal of Financial Economics, Elsevier, vol. 42(1), pages 63-104, September.
    69. Courteau, Lucie, 1995. "Under-Diversification and Retention Commitments in IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 487-517, December.
    70. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    71. Rajesh K. Aggarwal & Guojun Wu, 2006. "Stock Market Manipulations," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1915-1954, July.
    72. Lundstrum, Leonard L., 2002. "Corporate investment myopia: a horserace of the theories," Journal of Corporate Finance, Elsevier, vol. 8(4), pages 353-371, October.
    73. Millo, Yuval & MacKenzie, Donald, 2009. "The usefulness of inaccurate models: Towards an understanding of the emergence of financial risk management," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 638-653, July.
    74. Amihud, Yakov & Mendelson, Haim, 1987. "Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-553, July.
    75. McGoun, Elton G., 2003. "Finance models as metaphors," International Review of Financial Analysis, Elsevier, vol. 12(4), pages 421-433.
    76. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-764.
    77. Litzenberger, Robert H. & Budd, Alan P., 1970. "Corporate Investment Criteria and the Valuation of Risk Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(4-5), pages 395-419, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tunaru, Radu & Zheng, Teng, 2017. "Parameter estimation risk in asset pricing and risk management: A Bayesian approach," International Review of Financial Analysis, Elsevier, vol. 53(C), pages 80-93.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    2. Ramiah, Vikash & Xu, Xiaoming & Moosa, Imad A., 2015. "Neoclassical finance, behavioral finance and noise traders: A review and assessment of the literature," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 89-100.
    3. Alexandre Ripamonti & Raphael Videira & Denis Ichimura, 2020. "Asymmetric information and daily stock prices in Brazil," Estudios Gerenciales, Universidad Icesi, vol. 36(157), pages 465-472, December.
    4. Miglo, Anton, 2012. "Multi-stage investment, long-term asymmetric information and equity issues," MPRA Paper 46692, University Library of Munich, Germany.
    5. Detlef Seese & Christof Weinhardt & Frank Schlottmann (ed.), 2008. "Handbook on Information Technology in Finance," International Handbooks on Information Systems, Springer, number 978-3-540-49487-4, September.
    6. J. Barry Lin & Christos Pantzalis & Jung Chul Park, 2017. "Corporate derivatives use policy and information environment," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 159-194, July.
    7. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, October –.
    8. Paolo Fulghieri & Diego García & Dirk Hackbarth, 2020. "Asymmetric Information and the Pecking (Dis)Order," Review of Finance, European Finance Association, vol. 24(5), pages 961-996.
    9. Fulghieri, Paolo & Lukin, Dmitry, 2001. "Information production, dilution costs, and optimal security design," Journal of Financial Economics, Elsevier, vol. 61(1), pages 3-42, July.
    10. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Christopher J. Green & Colin Kirkpatrick & Victor Murinde (ed.), Finance and Development, chapter 12, Edward Elgar Publishing.
    11. Agoraki, Maria-Eleni K. & Gounopoulos, Dimitrios & Kouretas, Georgios P., 2022. "U.S. banks’ IPOs and political money contributions," Journal of Financial Stability, Elsevier, vol. 63(C).
    12. Attiya Yasmeen Javid, 2000. "Alternative Capital Asset Pricing Models: A Review of Theory and Evidence," PIDE Research Report 2000:3, Pakistan Institute of Development Economics.
    13. Huang, Yong & Uchida, Konari & Yu, Xuanying & Zha, Daolin, 2021. "Market timing in private equity placements: Empirical evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    14. Chen, Chen & Hanlon, Dean & Khedmati, Mehdi & Wake, James, 2023. "Annual report readability and equity mispricing," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    15. Hui Chen & Jianjun Miao & Neng Wang, 2010. "Entrepreneurial Finance and Nondiversifiable Risk," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4348-4388, December.
    16. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    17. Turner, John D., 2014. "Financial history and financial economics," QUCEH Working Paper Series 14-03, Queen's University Belfast, Queen's University Centre for Economic History.
    18. Martynova, Marina & Renneboog, Luc, 2009. "What determines the financing decision in corporate takeovers: Cost of capital, agency problems, or the means of payment?," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 290-315, June.
    19. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.
    20. David J. Brophy & Joel M. Shulman, 1992. "A Finance Perspective on Entrepreneurship Research," Entrepreneurship Theory and Practice, , vol. 16(3), pages 61-72, April.

    More about this item

    Keywords

    Theory of truth; Finance; Security valuation;
    All these keywords.

    JEL classification:

    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:39:y:2015:i:c:p:186-195. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.