Does less complex accounting improve price efficiency in conditions that encourage price bubbles?
Accounting experiments have found that less complex accounting leads to more efficient prices. Economic experiments have demonstrated that price bubbles occur frequently in certain types of laboratory markets and that these bubbles are invariant to reductions in complexity of fundamental value. The current study integrates these literatures to investigate whether reducing complexity in information about fundamental value leads to more efficient prices under conditions that encourage or discourage price bubbles. This question provides evidence on the implicit assumption in recent regulation that better accounting will mitigate price bubbles. In a laboratory market in which investors buy and sell shares of an asset that pays a periodic dividend, I show that investors are more likely to use accounting information when accounting is less complex. I also find that market price deviates less from fundamental value when investors use accounting information, but that this effect occurs only when excess cash, a variable shown to encourage bubbles, is low.