Asset Measurement Bases and Market Efficiency: A Laboratory Market Perspective

• In Event: 3.02 Investor Judgment II

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 in the mark-to-market regime perceive stronger links between performance and market price changes, and also perceive weaker links between performance and asset fundamentals. This corresponds with greater 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 study provides theory and evidence supporting the possibility that accounting methods may contribute to asset price bubbles, incremental to market economics.

Authors

• Nigel Barradale, Barradale Asset Management

• Brian Matthew Goodson, Clemson University

• Matthew Thomas Sooy, Western University