Manipulation and the Allocational Role of Prices

@inproceedings{Goldstein2005ManipulationAT,
  title={Manipulation and the Allocational Role of Prices},
  author={Itay Goldstein},
  year={2005}
}
It is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources. This paper identifies a limitation inherent in this role of prices. It shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm’s stock. When this happens the informativeness of the stock price… CONTINUE READING
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