How Financial Markets Create Superstars
65 Pages Posted: 19 Jan 2021 Last revised: 27 Nov 2023
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How Financial Markets Create Superstars
How Financial Markets Create Superstars
Date Written: November 20, 2023
Abstract
Price discovery in financial markets guides the efficient allocation of resources. Yet we argue that speculators uninformed about firms' fundamentals can profit from distorting the allocative function of prices by inflating stock prices. Such speculation can be profitable because high valuations attract employees, business partners, and investors who create value at targeted firms at the cost of diverting resources away from better firms. The resulting resource misallocation is worst in "normal" (neither hot nor cold) markets and when firms offer stakeholders performance compensation or equity. Investors, such as VCs, can also profit from inflating firm valuations in private markets.
Keywords: Speculation, manipulation, superstar firms, unicorns, market efficiency, stakeholders, high-skilled employees, misallocation of resources
JEL Classification: D62, D82, D84, G30
Suggested Citation: Suggested Citation