The "incomplete revelation hypothesis" and financial reporting

The most common form of the Efficient Markets Hypothesis (EMH) states that market prices fully reflect all publicly available information (Fama 1970). The EMH has been highly influential among academics, but practitioners and regulators appear unconvinced. Beliefs about inefficiency play a central role in the debate over recognizing expenses for incentive stock options. An alternative to the EMH called the "Incomplete Revelation Hypothesis" (IRH) is presented in a study. The IRH asserts that statistics that are more costly to extract from public data are less completely revealed in market prices. The IRH can account for many of the phenomena that are central to financial reporting but inconsistent with the EMH. The IRH is based on equilibrium outcomes in "noisy rational expectations" models. Because it is derived from models assuming that investors are rational, the IRH clarifies that informational inefficiency need not imply irrationality. The IRH extends the EMH by explicitly recognizing the costs of extracting statistics from public data.