Heterogeneous Information and Appraisal Smoothing

Abstract

This study examines the heterogeneous appraiser behavior andits implication on traditional appraisal smoothing theory. Thefindings demonstrate that the partial adjustment model isconsistent with the traditional appraisal smoothing argumentonly when all appraisers choose the same smoothing technique.However, if appraiser behavior is heterogeneous and exhibitscross-sectional variation due to the difference in their access to,and interpretation of information, the model actually leads to amixed outcome: The variance of the transaction-based returnscan be higher or lower than the variance of comparable-basedreturn depending on the degree of such heterogeneity. Contraryto what the traditional appraisal smoothing theory would predict,appraisal-based indices may not suffer any "smoothing" bias.These findings suggest that the traditional appraisal smoothingtheory, which fails to consider the heterogeneity of appraiserbehaviors, exaggerates the effect of appraisal smoothing.