THE INTERDEPENDENCE OF REPORTING DISCRETION AND INFORMATIONAL EFFICIENCY IN LABORATORY MARKETS

This study uses laboratory markets to examine how the level of market efficiency influences managers' use of reporting discretion, and how a llowing reporting discretion alters market efficiency, The results sho w managers that incur costs make favorable information available to mo re investors in less efficient markets but not in more efficient marke ts. Although reporting discretion does not change market price levels, it causes the markets to under-react to public information, apparentl y because investors overestimate the degree to which a favorable (unfa vorable) public signal indicates that the public signal was inflated ( deflated). Managerial reporting discretion may be related to under-rea ctions to earnings reports, which are also public disclosures subject to manipulation by managers.