Shyam Sunder

Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models

The study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one-period security. Returns to the security depended upon a randomly drawn state of nature. Some agents (insiders), whose identity was unknown to other agents, knew the state before the markets opened. With replication of market conditions the predictions of a fully revealing rational-expectations model are relatively accurate. Prices adjusted immediately to near rational-expectations prices; profits of insiders were virtually indistinguishable from noninsiders; and efficiency levels converged to near 100 percent.

Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets

The study explores the information aggregation properties of experimental markets. A fully-revealing rational expectations equilibrium exists in the competitive model of each of the markets studied. For markets with a single compound security in which traders have identical preferences, the rational expectations equilibrium mod el works well. However, if traders are allowed to have different preferences in the single security case, the observed information aggregation is minimal and rational expectations are not attained. If the single security is transformed to a complete set of Arrow-Debreu , state-contingent claims, the rational expectations model works well even when preferences differ. Copyright 1988 by The Econometric Society.

Methodological issues in the use of financial ratios

Abstract It appears that the extensive use of financial ratios by both practitioners and researchers is often motivated by tradition and convenience rather than resulting from theoretical considerations or from a careful statistical analysis. Basic questions, such as: Is the control for firm size, a major objective of the ratio form, called for by the theory examined; what is the structural relationship between the examined variables and size; and what is the optimal way to control for industry-wide factors, are rarely addressed by users of financial ratios. The major purpose of this study is to discuss the conditions under which conventional tools, such as financial ratios and measures of industry central tendency, achieve the intended objectives of analysis (e.g., size control). Various issues related to financial analysis, such as spurious correlation due to a common denominator, the choice of an optimal size variable, and the treatment of outlier observations, are also examined.

Indeterminacy of equilibria in a hyperinflationary world: Experimental evidence

The authors design and study an OLG experimental economy where the government finances a fixed real deficit through seigniorage. The economy has continua of nonstationary rational expectations equilibria and two stationary rational expectations equilibria. The authors do not observe nonstationary rational expectations paths. Observed paths tend to converge close to, or somewhat below, the low inflation stationary state. The adaptive learning hypothesis is consistent with the data in selecting the low inflation stationary state rational expectations equilibrium as a long-run stationary equilibrium. Nevertheless, simple adaptive learning models do not capture the market uncertainty or the biases observed in the data. Copyright 1993 by The Econometric Society.

MARKET FOR INFORMATION: EXPERIMENTAL EVIDENCE'

Equilibrium predictions of the noisy rational expectations model are relatively accurate for laboratory asset and information markets. When information about an assets uncertain dividend is sold to a fixed number of highest bidders, prices, allocations, efficiency, and a distribution of profit predictions of the full revelation rational expectations model in the asset market dominate the predictions of the Walrasian model; demand for information shifts leftward and its price approaches zero. When the price of information is fixed, the number of informed agents and the informativeness of the asset market adjusts to permit the information buyers to recover their investment in information. Copyright 1992 by The Econometric Society.

What Makes Markets Allocationally Efficient

What determines the allocative efficiency of markets? Why are double auctions, even with untrained human traders, allocationally efficient? We provide a simple explanation for these complex phenomena by showing how externally observable rules that define a market cause high allocative efficiency when individuals remain within the confines of these rules. We also show how the oft-ignored shape of extramarginal demand and supply affects efficiency by influencing the inverse relationship between the magnitude of efficiency loss and its probability.

Relationship Between Accounting Changes And Stock Prices - Problems Of Measurement And Some Empirical-Evidence

Generally accepted accounting principles allow alternative treatments of several types of accounting events. Financial accounting policy-making bodies such as the Accounting Principles Board and the Securities and Exchange Commission rule on the admissibility of various accounting procedures and on changes from one procedure to another. For this purpose, they need information about the effect of accounting procedures and changes in accounting procedures on the interests of various economic agents in society. Admissibility of alternative procedures implies that corporate managers must select one of the available procedures for their use. For making such selections, managers need information about the relationship of accounting procedures with corporate objectives. In making their investment decisions, investors too need information not only about the meaning of various accounting procedures but also about the relationship of these procedures with stock prices. In this paper, I report on a study of the relationship between alternative inventory cost flow assumptions (Lifo and Fifo) with the behavior of stock prices. The belief that an understanding of this relationship is relevant to the three classes of decision makers mentioned above provides the justification for the study.

Regulatory Competition Among Accounting Standards Within and Across International Boundaries

Most financial reporting jurisdictions across the world allow a local monopoly in financial reporting standards for publicly held corporation. In the United States, for example, the statutory authority over these standards is vested in the Securities and Exchange Commission, who delegates the task of writing standards to the Financial Accounting Standards Board, retaining an oversight function for itself. In some countries these standards are specified through statutes in varying levels of detail. Few countries permit their corporations to choose among two or more sets of competing standards; monopoly is the reigning norm. This paper examines regulatory competition as a model for writing and implementing corporate financial standards. Under this model, two or more approved standard-setting bodies are allowed to compete for the allegiance of the reporting entities. Each corporation can choose which of the two or more sets of competing standards it wishes to use in preparing its financial reports. Corporations must choose an entire set of standards in toto, clearly mark the reports with the set of standards used to prepare them, and pay a fee to the body who wrote the standards. We examine the consequences of such regulatory competition for the quality and efficiency of standards, quality of information provided to shareholders and other interested parties, and the efficiency of corporate governance

Expectations and learning under alternative monetary regimes: an experimental approach*

SummaryWe design and analyze experimental versions of monetary overlapping generations economies under alternative policy regimes. Economies with a constant level of real deficit financed through seignorage, economies in which the level of deficit is adapted in order to follow a monetary policy with a target rate of inflation, and economies with preannounced changes in deficit levels are reported here. We also examine the behavior of an economy with no stationary competitive equilibrium. Our time series are compared to rational expectations equilibrium paths and to adaptive learning dynamics.

Enforced Standards Versus Evolution by General Acceptance: A Comparative Study of E‐Commerce Privacy Disclosure and Practice in the United States and the United Kingdom

We present data on privacy practices in e-commerce under the European Unions formal regulatory regime prevailing in the United Kingdom and compare it with the data from a previous study of U.S. practices that evolved in the absence of government laws or enforcement. The codification by the E.U. law, and the enforcement by the U.K. government, improves neither the disclosure nor the practice of e-commerce privacy relative to the United States. Regulation in the United Kingdom also appears to stifle development of a market for Web assurance services. Both U.S. and U.K. consumers continue to be vulnerable to a small number of e-commerce Web sites that spam their customers, ignoring the latters expressed or implied preferences. These results raise important questions about finding a balance between enforced standards and conventions in financial reporting. In the second half of the 20th century, financial reporting has been characterized by both a preference for legislated standards and a lack of faith in its evolution as a body of social conventions. Evidence on whether this faith in standards over conventions is justified remains to be marshaled. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2005.