Does less complex accounting improve price efficiency in conditions that encourage price bubbles?
Abstract
Accounting experiments have found that less complex accounting leads to more
efficient prices. Economic experiments have demonstrated that price bubbles occur
frequently in certain types of laboratory markets and that these bubbles are invariant to
reductions in complexity of fundamental value. The current study integrates these
literatures to investigate whether reducing complexity in information about fundamental
value leads to more efficient prices under conditions that encourage or discourage price
bubbles. This question provides evidence on the implicit assumption in recent regulation
that better accounting will mitigate price bubbles. In a laboratory market in which
investors buy and sell shares of an asset that pays a periodic dividend, I show that
investors are more likely to use accounting information when accounting is less complex.
I also find that market price deviates less from fundamental value when investors use
accounting information, but that this effect occurs only when excess cash, a variable
shown to encourage bubbles, is low.