IDEAS home Printed from https://ideas.repec.org/a/kob/tjrevi/dec2013v3p21-59.html
   My bibliography  Save this article

Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets

Author

Listed:
  • Larry Bensimhon

    (Laboratoire Interdisciplinaire de Rechrche en Sciences de l’Action (LIRSA), Conservatoire National des Arts et Mètiers, France)

  • Yuri Biondi

    (Centre National de la Recherche Scientifique (France) and ESCP Europe (France))

Abstract

We experimentally explore how common knowledge provided by accounting systems affects investors' decision and shapes the formation of security prices over time. We design alternative accounting structures and run experiments in artificial security markets framed by these structures. In sessions where investors receive exogenous accounting information about ultimate earnings, prices converge to the fundamental levels derived from those earnings through backward induction. Accounting plays a role for the market. In sessions where investors receive endogenous accounting information about earnings that are linked to the ongoing clearing price of the security, market price levels and paths become indeterminate and lose earnings anchor; investors tend to form their expectations of future prices by forward, not backward, induction. Accounting plays its role from the market, and loses its relevance in financial decision-making. These laboratory results suggest that accounting information and its overarching structure are important to prevent market exuberance, excess volatility and the formation of financial bubbles. They further have relevant effects on market allocative efficiency, and revenue and wealth distribution among investors.

Suggested Citation

  • Larry Bensimhon & Yuri Biondi, 2013. "Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 3, pages 21-59, December.
    • Handle: RePEc:kob:tjrevi:dec2013:v:3:p:21-59
    as

    Download full text from publisher

    File URL: https://www.rieb.kobe-u.ac.jp/tjar/article/vol3/pdf/2.Bensimhon_and_Biondi.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sheryl B. Ball & Charles A. Holt, 1998. "Classroom Games: Speculation and Bubbles in an Asset Market," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 207-218, Winter.
    2. Davis, Douglas D. & Holt, Charles a., 1993. "Experimental economics: Methods, problems and promise," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(2), pages 179-212.
    3. Mark van Boening & Vernon L. Smith & Charissa P. Wellford, 2000. "Dividend timing and behavior in laboratory asset markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 567-583.
    4. Frydman, Roman, 1982. "Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium," American Economic Review, American Economic Association, vol. 72(4), pages 652-668, September.
    5. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
    6. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    7. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
    8. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    10. Kirchler, Michael, 2009. "Underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets. An experimental study," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 491-506, February.
    11. Yuri Biondi & Arnaldo Canziani & Thierry Kirat, 2007. "The Firm as an Entity: Implications for Economics, Accounting, and the Law," Post-Print halshs-00203355, HAL.
    12. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    13. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
    14. repec:pri:cepsud:91malkiel is not listed on IDEAS
    15. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
    16. Shyam Sunder, 2001. "Knowing What Others Know: Common Knowledge, Accounting, and Capital Markets," Yale School of Management Working Papers ysm326, Yale School of Management, revised 01 Feb 2002.
    17. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    18. Biondi, Yuri & Giannoccolo, Pierpaolo & Galam, Serge, 2012. "Formation of share market prices under heterogeneous beliefs and common knowledge," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5532-5545.
    19. Camerer, Colin, 1989. "Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
    20. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2005. "Coordination of Expectations in Asset Pricing Experiments," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 955-980.
    21. Plott, Charles R., 1989. "An updated review of industrial organization: Applications of experimental methods," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 19, pages 1109-1176, Elsevier.
    22. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    23. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
    24. Biondi Yuri, 2011. "The Pure Logic of Accounting: A Critique of the Fair Value Revolution," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 1(1), pages 1-49, January.
    25. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
    26. repec:cdl:ucsbec:13-89 is not listed on IDEAS
    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. Tang Vicki Wei, 2019. "The Role of Accounting and the Debate between Historical Cost and Fair Value," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 9(1), pages 1-3, March.
    2. Biondi Yuri, 2017. "Accounting for Europe’s Economy and Society: Considerations for Financial Stability, Economic Development and the Public Good," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 7(2), pages 65-77, July.
    3. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.

    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. Nuriddin Ikromov & Abdullah Yavas, 2012. "Cash Flow Volatility, Prices and Price Volatility: An Experimental Study," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 203-229, January.
    2. Shinichi Hirota & Juergen Huber & Thomas Stock & Shyam Sunder, 2018. "Speculation and Price Indeterminacy in Financial Markets: An Experimental Study," Cowles Foundation Discussion Papers 2134, Cowles Foundation for Research in Economics, Yale University.
    3. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2011. "On the ingredients for bubble formation: Informed traders and communication," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1831-1851.
    4. Kirchler, Michael, 2010. "Partial knowledge is a dangerous thing - On the value of asymmetric fundamental information in asset markets," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 643-658, August.
    5. Keser, Claudia & Markstädter, Andreas, 2014. "Informational asymmetries in laboratory asset markets with state-dependent fundamentals," University of Göttingen Working Papers in Economics 207, University of Goettingen, Department of Economics.
    6. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.
    7. Hirota, Shinichi & Huber, Juergen & Stöckl, Thomas & Sunder, Shyam, 2022. "Speculation, money supply and price indeterminacy in financial markets: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1275-1296.
    8. Eldad Yechiam & Amitay Kauffmann & Nathaniel J S Ashby & Gal Zahavi, 2017. "On the relation between economic bubbles and effort gaps between sellers and buyers: An experimental study," PLOS ONE, Public Library of Science, vol. 12(12), pages 1-15, December.
    9. Bulutay, Muhammed & Cornand, Camille & Zylbersztejn, Adam, 2022. "Learning to deal with repeated shocks under strategic complementarity: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1318-1343.
    10. Charron Jacques-Olivier, 2017. "Inefficient Debate. The EMH, the “Remarkable Error” and a Question of Point of View," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 7(3), pages 1-24, December.
    11. Zhengyang Bao & Andreas Leibbrandt & ple391, 2019. "Thar she resurges: The case of assets that lack positive fundamental value," Monash Economics Working Papers 12-19, Monash University, Department of Economics.
    12. Keser, Claudia & Markstädter, Andreas, 2014. "Informational asymmetries in laboratory asset markets with state-dependent fundamentals," University of Göttingen Working Papers in Economics 207 [rev.], University of Goettingen, Department of Economics.
    13. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2015. "Multi-period experimental asset markets with distinct fundamental value regimes," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 314-334, June.
    14. John Duffy & Janet Hua Jiang & Huan Xie, 2021. "Pricing Indefinitely Lived Assets: Experimental Evidence," CIRANO Working Papers 2021s-32, CIRANO.
    15. Claudia Keser & Andreas Markstädter, 2014. "Informational Asymmetries in Laboratory Asset Markets with State-Dependent Fundamentals," CIRANO Working Papers 2014s-30, CIRANO.
    16. Shinichi Hirota & Juergen Huber & Thomas Stock & Shyam Sunder, 2015. "Investment Horizons and Price Indeterminacy in Financial Markets," Cowles Foundation Discussion Papers 2001, Cowles Foundation for Research in Economics, Yale University.
    17. Markstädter, Andreas & Keser, Claudia, 2014. "Informational Asymmetries in Laboratory Asset Markets with State Dependent Fundamentals," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100359, Verein für Socialpolitik / German Economic Association.
    18. Nuzzo, Simone & Morone, Andrea, 2017. "Asset markets in the lab: A literature review," Journal of Behavioral and Experimental Finance, Elsevier, vol. 13(C), pages 42-50.
    19. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.
    20. Colasante, Annarita & Palestrini, Antonio & Russo, Alberto & Gallegati, Mauro, 2017. "Adaptive expectations versus rational expectations: Evidence from the lab," International Journal of Forecasting, Elsevier, vol. 33(4), pages 988-1006.

    More about this item

    Keywords

    Share Price Bubbles; Market Exuberance; Excess Volatility; Short-term Investors; Backward Induction; Forward Induction; Experimental Financial Markets; Fair Value; Mark-to-Market; Accounting Regime;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G1 - Financial Economics - - General Financial Markets

    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:kob:tjrevi:dec2013:v:3:p:21-59. 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: TJAR Editorial Office (email available below). General contact details of provider: https://edirc.repec.org/data/rikobjp.html .

    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.