Feedback Effects, Market Valuations, and Real Efficiency

Junghum Park ()
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Junghum Park: Lietuvos Bankas, Vilnius University

No 143, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper studies the interdependence of myopic corporate behavior and the so-called feedback effect, where financial prices contain useful information for corporate decision making. We model the feedback effect in a mostly standard trading environment, except that its tractable analysis is ensured by Pareto distribution of productivity. The analysis shows that the feedback effect causes a price inflation and the resulting long-term productive inefficiency, which can be understood in the context of innovation strategies. It sheds light on the negative side of learning from financial prices, and, at the same time, explains its prevalence, which requires the availability of superior information in financial markets.

Keywords: Feedback effect; learning; real efficiency; short-termism (search for similar items in EconPapers)
JEL-codes: D82 G01 G11 G14 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2026-05-08
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Persistent link: https://EconPapers.repec.org/RePEc:lie:wpaper:143

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