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How Financial Markets Create Superstars

Spyros Terovitis¹; Vladimir Vladimirov²

¹ University of Amsterdam · ² University of Amsterdam, the Netherlands, and CEPR

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 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 from better firms. Both large and small speculators, without pre-existing stock positions, 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.

DOI

10.1093/rfs/hhag015

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en

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