How Financial Markets Create Superstars

65 Pages Posted: 19 Jan 2021 Last revised: 27 Nov 2023

See all articles by Spyros Terovitis

Spyros Terovitis

University of Amsterdam, Finance Group

Vladimir Vladimirov

University of Amsterdam Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

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

Terovitis, Spyros and Vladimirov, Vladimir, How Financial Markets Create Superstars (November 20, 2023). Available at SSRN: https://ssrn.com/abstract=3745622 or http://dx.doi.org/10.2139/ssrn.3745622

Spyros Terovitis

University of Amsterdam, Finance Group ( email )

M3.04, Amsterdam Business School
Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands

Vladimir Vladimirov (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
329
Abstract Views
1,301
Rank
169,155
PlumX Metrics