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How Financial Markets Create Superstars

Author

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  • Vladimirov, Vladimir
  • Terovitis, Spyros

Abstract

High valuations reflect good growth prospects but can also improve these prospects by attracting key stakeholders, such as employees, business partners, or investors. We show that this feedback channel allows speculators without positive information about a firm to profit from inflating its stock price, thereby helping the firm to "fake it till it makes it." Reversing such feedback effects is hard even when traders have negative information. Likely targets are firms in "normal" (neither hot nor cold) markets, compensating stakeholders with performance pay or equity. Investors, such as VCs, can profit from inflating firms' valuations also in private markets.

Suggested Citation

  • Vladimirov, Vladimir & Terovitis, Spyros, 2020. "How Financial Markets Create Superstars," CEPR Discussion Papers 15546, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15546
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    References listed on IDEAS

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    Cited by:

    1. Terovitis, Spyros, 2022. "Information disclosure and the feedback effect in capital markets," Journal of Financial Intermediation, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Speculation; Manipulation; Superstar firms; Unicorns; Market efficiency; Stakeholders; High-skilled employees; Misallocation of resources; transparency;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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