Competing for Stock Market Feedback
42 Pages Posted: 7 Jul 2020 Last revised: 8 Jul 2020
Date Written: June 20, 2020
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: Suggested Citation