The traditional functional fixation view states that investors are always unsophisticated and, therefore, fail to unscramble the true cash flow implications of accounting data. At the other extreme, the efficient market hypothesis states that investors are always sophisticated and very accurately unscramble the true cash flow implications of accounting data. This article proposes and tests a middle ground between these opposite views. The extended functional fixation view proposes that when responding to accounting data, sometimes a firm's stock price is set by a sophisticated marginal investor, and sometimes it is set by an unsophisticated marginal investor. The likelihood that the stock price will be set by the latter type is conjectured to be measured by the relative proportion of a firm's stock held by unsophisticated investors as a whole. The extended functional fixation view is tested by examining the stock price reaction to quarterly earnings announcements of firms that undertook debt-equity swaps. Swaps produced an immediate accounting gain that amounted to about 20 percent of earnings for the quarter in which the swap was undertaken. Because sophisticated investors would have seen this gain at the initial swap announcement, the efficient market view predicts that there will be no stock price reaction to the re-announcement of the gain as part of the swap quarter's earnings. However, the extended functional fixation view predicts that there will be a reaction to the re-announcement of the gain because unsophisticated investors would not have known about the gain until the earnings announcement, at which time they would have misinterpreted it as a real gain, rather as just a realization of a previously unrealized capital gain. The larger the likelihood that a swapping firm's stock price was set by unsophisticated investors, the larger the stock price reaction. Overall, the empirical evidence presented appears inconsistent with the efficient market view, but consistent with the extended functional fixation view.