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 “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 also profit from inflating firms` valuations in private markets.