Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency



    1. Yale School of Management. This paper is part of my dissertation at Yale University. I sincerely thank my advisers, Rick Antle, John Geanakoplos, Brian Mittendorf, and Shyam Sunder (Chair), for their guidance, encouragement, and insights. I would also like to thank Francesco Bova, Foong Soon Cheong, Sumon Datta, Paul Fischer (discussant), Jonathan Glover, Guanmin Liao, Dong Lou, Panagiotis Patatoukas, Benjamin Polak, Larry Samuelson, Sachin Sancheti, Jacob Thomas, Robert E. Verrecchia, Varda Yaari (discussant), Hongjun Yan, Hema Yoganarasimhan, Dae-Hee Yoon, Frank Zhang, Michael Zhang, Yun Zhang, and other seminar participants at Yale School of Management, Yale Economics Department, the 2007 AAA northeast region meeting, and the 2007 AAA Chicago meeting. Special thanks are given to Abbie Smith (the editor) and an anonymous referee for insightful suggestions. All errors are my own.
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This paper examines the market efficiency consequences of accounting disclosure in the context of stock markets as a Keynesian beauty contest, an influential metaphor originally proposed by Keynes [1936] and recently formalized by Allen, Morris, and Shin [2006]. In such markets, public information plays an additional commonality role, biasing stock prices away from the consensus fundamental value toward public information. Despite this bias, I demonstrate that provisions of public information always drive stock prices closer to the fundamental value. Hence, as a main source of public information, accounting disclosure enhances market efficiency, and transparency should not be compromised on grounds of the Keynesian-beauty-contest effect.