How Financial Markets Create Superstars

Abstract

We show that speculative trading by uninformed traders 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. This leads to a misallocation of talent and resources. Speculative short selling is also possible but less likely, as firms can encourage beneficial and discourage harmful speculation by adjusting their corporate governance and transparency. Similar to speculators, investors in primary markets can benefit from inflating firms' valuations to unicorn status to attract non-financial stakeholders.