Experimental Market Behavior and Accounting Students' Knowledge of Permanent Earnings

Abstract

We conduct eight experimental asset markets to investigate accounting students' abilities to apply knowledge of “permanent earnings” in a market setting. Across the eight markets, asset value is a function of permanent earnings. Initially, we conduct three markets with participants recruited from an introductory financial accounting course, all of whom successfully completed the course. We find that market prices fail to converge to asset value in two of three sessions, even though data suggest that the students have factual knowledge of permanent earnings. We conduct five additional markets using undergraduate and graduate (master's) students recruited from an intermediate financial accounting course. In all five markets, prices converge to asset value. Our results suggest that additional course work beyond introductory financial accounting may be necessary to enrich students' knowledge stores so that they can apply knowledge of permanent earnings in a meaningful economic setting.