In search for good news: The relationship between accounting information, bounded rationality and hard-to-value stocks

Abstract

This study points out the complexities inherent to stock assessment distortion and how accounting information is priced. We obtain evidence about how investors, who are considered to have bounded rationality, influence the dynamics of the formation of stock prices. This effect was investigated in a Brazilian scenario, an environment of low informational quality, but one that represents an important route for international investments. The results indicate that stock market values do not tend to reflect the accounting information for hard-to-value stocks. In this case, accounting information is priced gradually over time. There is evidence that under more complex conditions, stock prices tend to mainly reflect accounting information related to good news. The results also showed that the adoption of International Financial Reporting Standards (IFRS) in Brazil increased the relevance of accounting information by reducing the complexity involved in stock assessment. Additionally, greater comovement of stock prices was identified for hard-to-value-stocks.