How Financial Markets Create Superstars

Vladimir Vladimirov and Spyros Terovitis

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

Abstract: High valuations reflect good growth prospects but can also improve these prospects by attracting key stakeholders, such as employees, business partners, or investors. We show that this feedback channel allows speculators without positive information about a firm to profit from inflating its stock price, thereby helping the firm to "fake it till it makes it." Reversing such feedback effects is hard even when traders have negative information. Likely targets are firms in "normal" (neither hot nor cold) markets, compensating stakeholders with performance pay or equity. Investors, such as VCs, can profit from inflating firms' valuations also in private markets.

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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