Does Information Transparency Decrease Coordination Failure?

This study experimentally tests the effect of information transparency on the probability of coordination failure in global games with finite signals. Prior theory has shown that in global games with unique equilibrium, the effect of information transparency is ambiguous. We find that in global games where the signal space is finite, increased transparency has two effects. First, increasing the level of transparency usually destroys uniqueness and precipitates multiple equilibria, so that the effect of transparency on coordination depends crucially upon which equilibrium is actually attained. Second, the level of transparency determines which of these equilibria is risk dominant. We find that increased transparency facilitates coordination only if it switches the risk-dominant equilibrium from the secure equilibrium to the efficient equilibrium. When the converse is true, improved transparency can be dysfunctional because it increases the probability of coordination failure.

Trading Volume and Public Information in an Experimental Asset Market with Short-Horizon Traders

We examine the joint impact of investors’ trading horizons and public information on trading volume. We hypothesize that public information leads to relative homogenization in the traders’ beliefs about the fundamental value of an asset and this reduces their disagreement regarding the fundamental value. Since the long-horizon traders’ trade is motivated by the fundamental value, such reduced disagreement leads to a reduction in trading volume. We further hypothesize that public information leads to polarization in the traders’ beliefs about other traders’ beliefs about the fundamental value and this polarization increases disagreement regarding other traders’ beliefs about the fundamental value. Since short-horizon traders’ trade is motivated by other traders’ beliefs about the fundamental value, such increased disagreement leads to an increase in trading volume. We test these hypotheses in an experimental asset market and find strong evidence in their support

Fair Value Measurement Under Level 2 Inputs: Do Market and Transaction Multiples Catch Firm-Specific Risk Factors?

This paper focuses on fair value measurement under the IFRS 13 assumptions and the reliability of the market and transaction multiples evaluations (\u201cLevel 2\u201d methods). We test the reliability of multiples evaluation approaches in different economic sectors, by comparing the fair value of 1678 companies estimated by multiples with the effective market capitalization over 15 years. Multiples\u2019 fair value does not provide a reliable measure of a company\u2019s value, with a gap that varies depending upon portfolios and time. In the case of observable Level 2 fair value indicators for a market, such as market multiples, the company\u2019s fair value is not consistent with the real market value. Thus, whenever Level 2 indicators are not observable, the method is increasing volatility and intrinsic evaluation risk

A Note on Strategic Sampling in Agencies

This paper studies sample design for process control in principal-agent settings where deterrence rather than ex post detection is the main issue. We show how the magnitude of gains from additional sampling can be calculated and traded off against sampling costs. It is shown that the optimal sample size shrinks as target rates are lowered.sampling, value of information, agency theory

Optimal Imprecision and Ignorance ∗

The information available to the capital market about a firm’s investment is usually imprecise due to the nature of financial accounting measurements. In addition, management usually has an information advantage over the capital market regarding some aspects of investment, particularly the investment’s inherent profitability. We refer to this information asymmetry as the market’s ignorance. We study how such ignorance and measurement imprecision interact to simultaneously determine equilibrium investment and capital market prices. We find that if either imperfection is present, the other is desirable; otherwise, the resulting equilibrium is very inefficient. An appropriate balance of ignorance and imprecision induces investment decisions and prices that are close to first best. The greater the capital market’s ignorance of profitability, the more imprecise should be the measurement of the Most accounting measurements are imprecise, providing at best a noisy representation of a firm’s operations and their underlying economic events. Is such imprecision necessarily harmful, or can it be value enhancing? Is there an ‘optimal ’ degree of imprecision fo

The Role of Information Asymmetry in Escalation Phenomena: Empirical Evidence

Economic rationality dictates that only incremental costs and benefits should affect decisions. Observed behavior often seems to violate this principle, resulting in unwarranted commitment to past choices and their escalation. In this paper, we present experimental results that show that information asymmetry plays a key role in determining when such escalation behavior occurs. This finding opens new avenues for mitigating escalation behavior since information asymmetry is an environmental feature that can be modified by organization design and explicit economic rewards

Should Intangibles Be Measured: What Are the Economic Trade-Offs?

We investigate whether a firm's intangible investments should be measured and separated from operating expenses. We find that the information extracted from accounting reports of investments and earnings is different when intangibles are measured and identified separately from operating expenses than when intangibles are left commingled with operating expenses. This difference in the market's information causes a change in the behavior of market prices, inducing changes in the firm's investments and cash flows. Thus, from a "real effects" perspective, measuring intangibles is not unambiguously desirable. We identify the conditions under which providing information on intangibles may be desirable. This study also shows the inadequacy of statistical associations between accounting numbers and prices as a basis for evaluating the desirability of measuring intangible investments. We show that the measurement of intangibles alters the very distribution of cash flows about which the measurement regime is seeking to provide information. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.

Information Transparency and Coordination Failure: Theory and Experiment

We examine the effect of higher order beliefs on the ability of decentralized decision makers to coordinate and take advantage of improvements in information transparency that can increase welfare. Theories that address this question have not been empirically explored. We study coordination in a laboratory experiment with privately informed decision makers. Economic outcomes in the setting depend both on agents\u27 rational beliefs regarding economic fundamentals and on their rational beliefs regarding the beliefs of other agents. Increasing information transparency mitigates uncertainty about economic fundamentals but may increase strategic uncertainty, precipitating multiple equilibria and less efficient group outcomes. We provide evidence that sometimes the equilibrium attained by creditors is inferior from a welfare perspective to other available equilibria. Risk dominance appears to determine equilibrium selection in our setting