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Track T1-4: Entrepreneurship and VC
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Presentations | ||
How Financial Markets Create Superstars 1University of Amsterdam; 2CEPR 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 o¤er stakeholders performance compensation or equity. Investors, such as VCs, can also profit from inflating firm valuations in private markets.
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