Financial reporting and market efficiency with extrapolative investors

Bianchi, Milo; Jéhiel, Philippe

doi:10.1016/j.jet.2015.02.009

Cited by 11 publications

(15 citation statements)

References 68 publications

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“…Under the assumption that investors use sample-based reasoning, and therefore, are not able to read every single line item, the manager is able to cause an upward response to the reported earnings by obfuscating the report (Bianchi & Jehiel, 2015)). Since the degree of obfuscation, together with investors' extrapolative nature, causes an increase in sensitivity to reported profitability in the market, the manager is enticed to exaggerate the earnings of the firm more than he would if the market was perfectly rational.…”

Section: Introductionmentioning

confidence: 99%

Manipulation and obfuscation of financial reports

Lambertsen

2023

Business Fin & Account

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Anecdotally, not all investors are able to read and understand the financial report. I consider a strategic reporting game where investors are bounded rational and only pay attention to randomly sampled parts of the financial report and then extrapolate the value of the firm based on this. The manager can both obfuscate and bias the financial report. Obfuscation works by disaggregating the report into any number of line items, modeled as nonnegative signals, whose mean is constrained to be equal to the biased profitability of the firm. There can be synergies between biasing and obfuscation, causing financial statements to be both less transparent and more biased when investors are extrapolative.

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Section: Introductionmentioning

confidence: 99%

Manipulation and obfuscation of financial reports

Lambertsen

2023

Business Fin & Account

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“…In the context of optimal insurance design, Jeleva and Villeneuve (2004) derives conditions for insurers to offer random insurance contracts where reimbursements in a given state are made conditional to the realization of some other random circumstances. In a different vein, Bianchi and Jehiel (2015) shows that a principal may gain by There is no reason why the direct welfare cost bearing on those who actually face noise would always overcome the gain from the expanded scope of redistribution. We suspect that this is more likely to happen if low skilled are strongly risk averse while high skilled do not suffer much from the noise, since then noise may not deter much the high skilled from mimicking the low skilled workers.…”

Section: Introductionmentioning

confidence: 99%

Optimal random taxation and redistribution

Gauthier¹,

Laroque²

2022

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We assess the usefulness of stochastic redistribution among a continuum of riskaverse agents with quasilinear utilities in labor. Agents differ according to their consumption tastes, which remain private information. We identify circumstances where stochastic redistribution is socially dominated by the deterministic policy where aftertax income lotteries are replaced with their certainty equivalent. We also provide a parametric example where feasible and incentive compatible lotteries locally dominate the optimal deterministic menu. In this example the downward pattern of incentives prevailing in the deterministic case is reversed to an upward pattern in the stochastic case.

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“…The corresponding valuation method can be related to the representativeness heuristic (in particular, to the law of small numbers) as well as to the extrapolative heuristic, which have been widely discussed in psychology as well as in the context of financial markets . Our formalization is most similar to Spiegler () and Bianchi and Jehiel (), but the literature offers several other models of extrapolative investors…”

Section: Introductionmentioning

confidence: 99%

Bundlers' dilemmas in financial markets with sampling investors

Bianchi

Jéhiel

2020

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We study banks' incentive to pool assets of heterogeneous quality when investors evaluate pools by extrapolating from limited sampling. Pooling assets of heterogeneous quality induces dispersion in investors' valuations without affecting their average. Prices are determined by market clearing assuming that investors can neither borrow nor short-sell. A monopolistic bank has the incentive to create heterogeneous bundles only when investors have enough money. When the number of banks is sufficiently large, oligopolistic banks choose extremely heterogeneous bundles, even when investors have little money and even if this turns out to be collectively detrimental to the banks. If, in addition, banks can originate low quality assets, even at a cost, this collective inefficiency is exacerbated and pure welfare losses arise. Robustness to the presence of rational investors and to the possibility of short-selling is discussed.

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Financial reporting and market efficiency with extrapolative investors

Cited by 11 publications

References 68 publications

Manipulation and obfuscation of financial reports

Manipulation and obfuscation of financial reports

Optimal random taxation and redistribution

Bundlers' dilemmas in financial markets with sampling investors

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