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 by Keynes (1936) and recently formalized by Allen, Morris, and Shin (2006). In such markets, public information plays an additional coordination role, biasing stock prices away from the consensus fundamental value toward public information. Despite this bias, I demonstrate that provisions of public information always drives 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.

Keywords: Short Horizons, Keynesian Beauty Contest, Rational Expectations, Price Efficiency, Disclosure, Social Welfare, Information

JEL Classification: M41, M45, G38, D82