How Financial Markets Create Superstars

Abstract

By aggregating information into stock prices, financial markets help guide the allocation of resources. We show that speculators without information about firms' fundamentals can exploit this allocational role of prices and profit from inflating firm valuations. Uninformed speculation is profitable because high valuations attract employees, business partners, and investors, creating value at targeted firms at the cost of diverting resources away from better firms. Both large and smaller speculators without an inventory of the firm's stock can profit from uninformed speculation, particularly when targeting firms with moderate Q, operating in "normal" (neither hot nor cold) markets, and using performance pay or equity to attract stakeholders. 

Keywords: Speculation, manipulation, superstar firms, unicorns, market efficiency, stakeholders, high-skilled employees, misallocation of resources

JEL Classification: D62, D82, D84, G30