Competing for Stock Market Feedback

42 Pages Posted: 7 Jul 2020 Last revised: 8 Jul 2020

See all articles by Caio Machado

Caio Machado

Pontificia Universidad Católica de Chile

Ana Elisa Pereira

Universidad de los Andes, Chile

Date Written: June 20, 2020

Abstract

We study how firms compete to attract informed trading when financial markets provide information to decision makers. Firms increase managerial risk taking to compete for market information, leading to a rat race in which firms overinvest in a (failed) attempt to increase their own stock informativeness. Efficiency gains of learning from the market may be eliminated: There is always an equilibrium where financial markets provide useful information, but are completely ignored by decision makers. Moreover, in any equilibrium firms react too little to market activity. Our results highlight that critically different outcomes arise when firms interact in integrated financial markets.

Keywords: information aggregation, financial markets, feedback effect, real efficiency.

JEL Classification: G14, G30, D82

Suggested Citation

Machado, Caio and Pereira, Ana Elisa, Competing for Stock Market Feedback (June 20, 2020). Available at SSRN: https://ssrn.com/abstract=3632063 or http://dx.doi.org/10.2139/ssrn.3632063

Caio Machado

Pontificia Universidad Católica de Chile ( email )

Av. Vicuna Mackenna 4860
Santiago, Región Metropolitana
Chile

Ana Elisa Pereira (Contact Author)

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

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