Do the Benefits of Reducing Accounting Complexity Persist in Markets Prone to Bubble?

• Published in: Contemporary accounting research 2011-09, Vol.28 (3), p.957-989
• Main Author: Hobson, Jessen L.
• Format: Article
• Language: English
• Subjects: Accounting; Bubbles; Complexity theory; Economic conditions; Efficient markets; Financial accounting; Financial information; Information processing; Market efficiency; Regulation; Securities trading; Stock prices; Studies; Traders; U.S.A; Value
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/j.1911-3846.2011.01089.x

Standard setters and regulators generally assume that making accounting information easier to process leads to more efficient markets, thereby benefiting traders. I test that assumption in markets that I construct to be more prone to price bubbles. Market efficiency (i.e., trading at expected fundamental economic values) will increase if and only if reduced accounting information complexity leads traders to process that information to a greater extent than more complex information and then to trade in a manner that moves price closer to fundamental value. I test these relationships in an experiment in which traders buy and sell shares of an asset in a multiperiod, double auction market in which speculative capital gains are possible. I find that reducing complexity in information increases information processing ease. This increased information processing increases market efficiency in markets less prone to price bubbles but not in markets more prone to price bubbles. This is because in markets more prone to price bubbles some traders that process information trade in a rational manner that moves price away from expected fundamental value, thereby harming other traders. Thus, the benefits of reducing accounting complexity do not persist in markets prone to bubble. [PUBLICATION ABSTRACT]