How Financial Markets Create Superstars

Abstract

We show that uninformed speculative trading inflating a firm's stock price can help the firm "fake it till it makes it" by attracting high-quality stakeholders that would not have joined otherwise. Speculators profit from targeting intermediately-transparent firms with highly uncertain prospects, operating in "normal" (neither hot nor turbulent) markets. Unlike speculation inflating prices, short-selling scaring off stakeholders is often unprofitable even when traders have negative information about the firm. Overall, speculative trading is more likely to benefit than harm targeted firms. Uninformed investors can benefit from inflating firms' valuations also in private markets.

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

JEL Classification: D62, D82, D84, G30