DP15546 How Financial Markets Create Superstars

Author(s): Spyros Terovitis, Vladimir Vladimirov
Publication Date: December 2020
Keyword(s): high-skilled employees, manipulation, Market Efficiency, misallocation of resources, Speculation, Stakeholders, Superstar Firms, transparency, unicorns
JEL(s): D62, D82, D84, G30
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15546

This paper shows that manipulative trading by speculators can create value for shareholders by simulating a "buzz" around a firm and turning it into a star. The speculators' profit comes from helping the firm attract stakeholders, such as high-quality employees and business partners, that would have otherwise not worked with it. Thus, price manipulation leads to a misallocation of talent and resources. Similar to speculators, investors in primary markets can benefit from inflating firms' valuations to unicorn status if that helps attract stakeholders. Opportunities for manipulation are asymmetric, as firms can encourage manipulation benefiting them and discourage manipulation harming them by adjusting their corporate governance and transparency.