Feedback loops, fair value accounting and correlated investments

Feedback loops, fair value accounting and correlated investments This paper presents and tests a model of the price dynamics that arise when investors fail to recognize the redundancy of unrealized gains and losses (“UGLs”) that are correlated with the firm’s past returns. Consistent with the predictions of our model, our experiment shows that a firm’s prices and earnings become highly volatile when correlated investment is large and correlated UGLs are made salient by comprehensive income reporting. The results suggest that including correlated UGLs in performance numbers could induce violations of weak-form efficiency that exacerbate volatility in share prices and earnings. Review of Accounting Studies Springer Journals

Feedback loops, fair value accounting and correlated investments

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Kluwer Academic Publishers-Plenum Publishers
Copyright © 2006 by Springer Science+Business Media, LLC
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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