Efficient Markets Hypothesis Essay

6047 Words Feb 9th, 2012 25 Pages
© 2002 American Accounting Association Accounting Horizons Vol. 16 No. 3 September 2002 pp. 233–243

COMMENTARY

The “Incomplete Revelation Hypothesis” and Financial Reporting
Robert J. Bloomfield
Robert J. Bloomfield is an Associate Professor at Cornell University. INTRODUCTION The most common form of the Efficient Markets Hypothesis (EMH) states that market prices fully reflect all publicly available information (Fama 1970). The EMH has been highly influential among academics, but practitioners and regulators appear unconvinced. Investors work hard to identify mispriced stocks on the basis of public data, or pay others to do so, even though the EMH asserts that such efforts are wasted. Managers seek to boost stock prices by hiding
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For example, why should the market underreact to large earnings changes, rather than overreact? Without a theory predicting how and why markets are inefficient, studies showing mispricing can be viewed as statistical flukes resulting from fishing expeditions (Fama 1998; Kothari 2001).
This paper in an outgrowth of presentations at the 2001 P. D. Leake Lectures at Oxford University, the 2001 AAA Doctoral Consortium, the 2001 Conference on Experimental Methods at Harvard University, and Cornell University. Thanks to Paul E. Fischer, John Hand, David Hirshleifer, Mark Nelson, Maureen O’Hara, and Tom Dyckman for helpful comments.

Corresponding author: Robert J. Bloomfield Email: rjb9@cornell.edu

Submitted: August 2001 Accepted: April 2002

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Accounting Horizons/September 2002

In this paper, I present an alternative to the EMH called the “Incomplete Revelation Hypothesis” (IRH). The IRH asserts that statistics that are more costly to extract from public data are less completely revealed in market prices. The IRH can account for many of the phenomena that are central to financial reporting but inconsistent with the EMH. It predicts that investors devote substantial resources to identifying mispriced stocks on the basis of public data, that managers seek to boost stock prices by hiding bad news in footnotes, and that regulators may wish to defeat such efforts, because

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