Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency

Abstract

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 byKeynes [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.