Long‐Short Equity Portfolios

Jacobs, Bruce I.; Levy, Kenneth N.

doi:10.1002/9780470404324.hof002033

Cited by 4 publications

(1 citation statement)

References 13 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In each market, half of the traders are randomly assigned to a long (short) position, such that long (short) traders can only buy (sell short) shares of stock . This matches the majority situation of investors in our natural setting of interest (Jacobs and Levy []) and allows for a cleaner test of bid discounts and ask premiums. Traders keep these roles for the duration of the study.…”

Section: Experimental Methodssupporting

confidence: 61%

Earnings Metrics, Information Processing, and Price Efficiency in Laboratory Markets

Elliott

Hobson

White

2015

J of Accounting Research

View full text Add to dashboard Cite

An enduring issue in financial reporting is whether and how salient summary measures of firm performance (“earnings metrics”) affect market price efficiency. In laboratory markets, we test the effects of salient earnings metrics, which vary in how they combine persistent and transitory elements, on investor information search, beliefs about value, offers to trade, and market price efficiency. We find that including transitory elements in salient earnings metrics causes traders to search unnecessarily for further information about these elements and to overestimate their effect on fundamental value relative to a rational benchmark. In contrast, separately displaying persistent elements in earnings increases the accuracy of traders’ value estimates. Prices generally reflect traders’ beliefs about value, and prices are most efficient when transitory elements are excluded from earnings metrics entirely. Our study contributes to research on salience effects in financial reporting by showing that including transitory elements in salient earnings metrics causes inefficient information search and biased beliefs about value that can aggregate to affect market prices. We also contribute to research in experimental markets by showing that redundant disclosure is not always beneficial; redundant disclosure of transitory earnings elements, in particular, appears to have negative consequences for investor behavior and market efficiency.

show abstract

Section: Experimental Methodssupporting

confidence: 61%