Working Paper: CEPR ID: DP15546
Authors: Spyros Terovitis; Vladimir Vladimirov
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.
Keywords: speculation; manipulation; superstar firms; unicorns; market efficiency; stakeholders; high-skilled employees; misallocation of resources; transparency
JEL Codes: D62; D82; D84; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high valuations (D46) | attract key stakeholders (O36) |
| inflated stock prices (E31) | increased stakeholder interest (G34) |
| increased stakeholder interest (G34) | enhances firm's prospects (L25) |
| uninformed speculation (D84) | inflate stock prices (G10) |
| inflated stock prices (E31) | profit for uninformed speculators (D84) |
| speculation (D84) | cross-subsidization of genuinely good firms (D26) |