How Financial Markets Create Superstars

Spyros Terovitis and Vladimir Vladimirov

No 15546, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: By aggregating information into stock prices, financial markets help guide the allocation of resources. We show that speculators without information about firms’ fundamentals can exploit this role of prices and profit from inflating firm valuations. Uninformed speculation is profitable because high valuations attract employees, business partners, and investors, creating value at targeted firms at the cost of diverting resources from better firms. Both large and small speculators, without pre-existing stock positions, can profit from uninformed speculation, particularly when targeting firms with moderate Q, operating in “normal†(neither hot nor cold) markets, and using performance pay or equity to attract stakeholders.

Keywords: Speculation; Manipulation; Superstar firms; Unicorns; Market efficiency; Stakeholders; High-skilled employees; Misallocation of resources; transparency (search for similar items in EconPapers)
JEL-codes: D62 D82 D84 G30 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-bec and nep-cwa
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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