An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jessen Law Hobson
Florida State University

Abstract: Accounting literature has found that less complex accounting leads to more efficient prices while experimental economics literature has studied a type of market in which price bubbles occur frequently and are invariant to changes in fundamental value. This research combines these literatures to investigate whether reducing complexity in information about fundamental value leads to more efficient prices under conditions that encourage 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, and that market price deviates less from fundamental value when investors use accounting information, but only when excess cash, a variable shown to encourage bubbles, is low.

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