[The nature of information regulation depends on the informational efficiency of capital markets (see Beaver 1989, 152-71; Dyckman and Morse 1986, 82-91). Consequently, researchers in accounting and finance have spent considerable effort attempting to measure efficiency. Although this investigation has spanned many research designs and has been applied to many different information signals, empirical tests all suffer from the same basic problem: the benchmark of interest, an informationally efficient market, is unobservable. The asset price that would have prevailed in an efficient market must therefore be modeled, and the test of market efficiency is confounded with a test of the asset-pricing model. Because of this ambiguity, whenever a researcher claims to find an abnormal return based on some information signal another researcher invariably responds that risk was not adequately controlled. For instance, Bernard and Thomas (1989, 1990) present evidence that markets do not adequately adjust to quarterly earnings announcements (i.e., there is a significant post-announcement drift), while Ball et al. (1990) argue that the market adjustment may be correct if the level of risk during the announcement period is adequately controlled for. Unlike naturally occurring markets, the efficiency of a laboratory market can be measured directly by creating another "artificial" economy that is identical to the economy of interest, except that all information is fully disseminated. The price in the artificial economy is the efficient price by definition; it is determined endogenously and without reference to an asset-pricing model. Using this method of measuring a market's efficiency, this study investigates how efficiency is influenced by different information or market structures. Although such an investigation will not resolve the issue of whether naturally occurring markets are efficient, laboratory results can identify features of a market or information structure that aid or impede efficiency. The study compares two information structures that differ by whether there is aggregate certainty in the market; that is, whether the union of all traders' information signals perfectly identifies the value of the risky asset. Previous experimental research in market efficiency has used markets with aggregate certainty. However, many of the difficulties of decision making under uncertainty disappear when the information in the market collectively reveals the asset's payoff. On the other hand, for the experiments conducted here, there are relatively more signals to aggregate in the markets with aggregate certainty. The results show that in markets where different traders have different information signals, the presence of aggregate uncertainty significantly reduces efficiency relative to similar markets with aggregate certainty. However, the results also show that markets are very efficient when some traders have a common but imperfect information signal and other traders are uninformed. In these markets there is aggregate uncertainty but no diversity of information among informed traders. Thus, diversity of informed traders' information and aggregate uncertainty together lead to inefficient markets, but neither treatment by itself causes inefficiency. The study also manipulates the number of traders in the market. It is sometimes argued that markets are efficient because there are a large number of traders whose individual errors average out. However, there is no reason to believe that the asset-pricing relation applies equal weight to each trader's belief, so a central limit result may not hold. The results show that the number of traders has no significant impact on the efficiency of the final prices in a trading period. Within a trading period, however, markets with only a few traders converge to the efficient price much more quickly than do markets with many traders. The results also show that there is a greater diversity of behavior in the markets with many traders. It is possible that this increased diversity increases the number of "noisy" transactions, making it more difficult to infer information from market data. In any investigation of a market's efficiency, different traders must have different information at the time efficiency is being assessed; otherwise the market is efficient by definition. Although accounting disclosures are publicly available they can effectively generate different information signals to different traders. The markets presented here give two examples. In the aggregate certainty treatment, some traders received good news signals and other traders received bad news signals. An example of this type of information system is an economy where different traders having different earnings expectation models. In such an economy the same earnings report can be good news to some traders and bad news to other traders. As long as the "correct" earnings expectation model is unknown, each trader would find the other traders' signals-in this case their forecast errors-informative. In the number-of-traders treatment, some traders receive a signal while other traders do not. An example of this type of information system is an economy where some traders receive accounting disclosures very quickly by subscribing to a wire news while other traders receive the information via third-class mail. Here the uninformed traders would benefit by learning the informed traders' signal.]

[Security regulation relies heavily on the public disclosure of information by firms. Mandated public disclosure has expanded beyond the traditional accounting statements to include information on a firm's segmental performance, competitive environment, R&D expenditures, executive compensation, and pending litigation. Investors, however, also have access to a variety of costly private information. These sources range from analyst forecasts to illegally obtained "inside" information. Many studies have reported the impact of a public signal on traders' welfare absent other private information sources (e.g., Hakansson et al. 1982; Hirshleifer 1971; Marshall 1974; Ng 1975; Ohlson and Buckman 1981), and many others have reported on how private information acquisition will change in response to the public signal (e.g., Gonedes 1980; Gonedes et al. 1976; Hakansson 1977; Lundholm 1991; Verrecchia 1982a). However, little attention has been focused on how welfare will change in response to public information, taking into account both the direct effect of the public signal and its indirect effect due to the change in private information acquisition. In this article, we present three different models designed to elucidate how the disclosure of public information can enhance the welfare of traders in a financial market when some or all traders also have access to costly private information. We begin our investigation by revisiting the work of Diamond (1985). In an economy where traders have the opportunity to acquire private signals about a single asset's payoff, Diamond shows that traders unanimously prefer the release of a public signal sufficiently precise to eliminate all private information acquisition. This is a potentially important result for accounting; positive welfare effects caused by public signals have been difficult to come by (see Verrecchia 1982a). We analyze the underlying cause of Diamond's result and its robustness to changes in the economy. Our first example shows that the result is not robust when the private signals have correlated rather than independent errors. However, our second example shows that Diamond's positive welfare result extends to an economy with multiple assets when the private signals have independent errors, regardless of the degree of correlation between the assets' underlying payoffs. The extension to an economy with multiple correlated assets is one way to assess the welfare properties of "information transfers." Our third example considers an economy where some traders are allowed to acquire private information of varying quality while others are denied access to private information. Some traders clearly have differential access to information about a firm's prospects, possibly because of a unique relationship with the firm (e.g., an employee or supplier), or economies of scale in information acquisition and production (e.g., an analyst). We assess how a public signal can enhance the welfare of traders denied access to the information market, regardless of its effect on the informationally well-endowed traders. We believe that this final application reflects the regulatory concern that brought about the Security and Exchange Acts-that public information should be used to enhance the welfare of uninformed traders. We show, however, that the uninformed traders do not necessarily prefer to use a public signal to eliminate the informed traders' incentives to acquire information; they prefer this solution only when they are in the minority. Paradoxically, uninformed traders prefer to use public signals to enhance their welfare only when they may have insufficient power to do so. This occurs because, when the uninformed traders are in the majority, the loss in risk-sharing opportunities that accompany the public signal outweighs the benefit of informational parity.]

[This paper examines the relations between the disclosure practices of firms, the number of analysts following each firm and properties of the analysts' earnings forecasts. Using data from the Report of the Financial Analysts Federation Corporate Information Committee (FAF Report 1985-89), we provide evidence that firms with more informative disclosure policies have a larger analyst following, more accurate analyst earnings forecasts, less dispersion among individual analyst forecasts and less volatility in forecast revisions. The results enhance our understanding of the role of analysts in capital markets. Further, they suggest that potential benefits to disclosure include increased investor following, reduced estimation risk and reduced information asymmetry, each of which have been shown to reduce a firm's cost of capital in theoretical research.]

The article investigates how capital markets efficiency is influenced by different information or market structures in the United States. The nature of information regulation depends on the informational efficiency of capital markets. Researchers in accounting and finance have spent considerable effort attempting to measure efficiency. Although this investigation has spanned many research designs and has been applied to many different information signals, empirical tests all suffer from the same basic problem: the benchmark of interest, an informationally efficient market, is unobservable. The asset price that would have prevailed in an efficient market must therefore be modeled, and the test of market efficiency is confounded with a test of the asset-pricing model. Because of this ambiguity, whenever a researcher claims to find an abnormal return based on some information signal another researcher invariably responds that risk was not adequately controlled. The efficiency of a laboratory market can be measured directly by creating another artificial economy that is identical to the economy of interest, except that all information is fully disseminated.

Reviews the book "The Value of Communication in Agency Contracts: Theory and Experimental Evidence," by Joyce Berg, Lane Daley, Frank Gigler and Chandra Kanodia.

We document how the effectiveness of an accruals-based trading strategy changes with the benchmark used to identify an extreme accrual. We measure “percent accruals” as accruals scaled by earnings, rather than total assets, and show that this seemingly small change produces a radically different sort of the data. We find that a trading strategy based on percent accruals yields significantly larger annual hedge returns than the traditional accruals measure, and does so mostly by improving the long position in low-accrual stocks. The hedge returns are also significant in all but the lowest quintile of arbitrage risk. We show that percent accruals more effectively select firms where the difference between sophisticated and nai¨ve forecasts are the most extreme. As such, our results are consistent with the earnings fixation hypothesis and are inconsistent with some alternative explanations for the accrual anomaly.

Presents three different models designed to elucidate how the disclosure of public information can enhance the welfare of traders in a financial market when some or all traders also have access to costly private information. Ex ante expected utility; Reversal of the Diamond model; Use of public signals to enhance the welfare of uninformed traders.

Examines the relations between the disclosure practices of firms, the number of analysts following each firm and properties of the analysts' earnings forecasts. Forecast dispersion and disclosure; Forecast accuracy and disclosure; Volatility of forecast revisions and disclosure.

We examine the readability of text and the use of numbers in the annual filings and earnings press releases of foreign firms listed on U.S. stock exchanges. We find that foreign firms generally write clearer text and present relatively more numerical data than their U.S. firm counterparts. More importantly, we find that the readability of the text and use of numbers increases as the foreign firms get geographically further from the U.S. It also increases as the foreign firm's home country has greater differences in accounting standards or investor protection laws relative to the U.S. Further corroborating our results, we also find that these communication efforts are partially successful. Within a country, firms that produce relatively more readable disclosures attract relatively more U.S. institutional ownership. Collectively, our results suggest that foreign firms are responding to a perceived reluctance on the part of U.S. investors to own them and attempt to lower the investors' information disadvantage or psychological distance by providing clearer and more concrete disclosures.