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1、RevAccStud(2006)11:377416DOI10.1007/s11142-006-9003-2Feedbackloops,fairvalueaccountingandcorrelatedinvestmentsRobertJ.BloomfieldÆMarkW.NelsonÆStevenD.SmithPublishedonline:15June2006ÓSpringerScience+BusinessMedia,LLC2006AbstractThispaperpresentsandtestsamodelofthepricedynamicsthatarisewheni
2、nvestorsfailtorecognizetheredundancyofunrealizedgainsandlosses(UGLs)thatarecorrelatedwiththefirmspastreturns.Consistentwiththepredictionsofourmodel,ourexperimentshowsthatafirmspricesandearningsbecomehighlyvolatilewhencorrelatedinvestmentislargeandcorrelatedUGLsaremadesalientbycomprehensivei
3、ncomereporting.TheresultssuggestthatincludingcorrelatedUGLsinperformancenumberscouldinduceviolationsofweak-formefficiencythatexacerbatevolatilityinsharepricesandearnings.KeywordsFair-valueaccountingÆMarketefficiencyÆLaboratorymarketsJELClassificationM41ÆC92ÆG14Accountingresearchersandregulat
4、orswidelyacceptthatafirmsaccountingreportsinfluenceitsstockreturns.Thispaperexaminesthepricedynamicsthatarisewhenafirmsaccountingreportsarepredictablefromitsstockreturnsbecausethefirmtakesapositioninanassetthatgeneratesunrealizedgainsandlosses(UGLs)thatarecorrelatedwiththefirmsreturns.Dependin
5、gonthenatureofthecorrelatedinvestmentandtheparticularaccountingmethodsthatR.J.Bloomfield(&)ÆM.W.NelsonJohnsonGraduateSchoolofManagement,CornellUniversity,Ithaca,NY14853,USAe-mail:rjb9@cornell.eduM.W.Nelsone-mail:mwn2@cornell.eduS.D.SmithUniversityofIllinoisatUrbanaChampaign,211WohlersHall,
6、1206SouthSixthStreet,Champaign,IL61820,USAe-mail:smithsd@uiuc.edu123378R.J.Bloomfieldetal.areapplied,correlatedUGLscanaffectincome,comprehensiveincome,orfootnotedisclosures,orcangounreported.Forexample,undercurrentGAAP,correlatedUGLsarereportedinoperatingincomeorcomprehensiveincomewhenthey
7、arisebecausefirmsclassifyastradingsecuritiesoravailable-for-salesecuritiesinvestmentsthatareexposedtoriskssimilartothosefacedbythefirm(suchasaninvestmentintheequityoffirmsintheirownindustry).ThemostextremeformofcorrelatedUGLsoccurwhenafirmrecognizesUGLsassociatedwithinv
