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Feedback Effects, Market Valuations, and Real Efficiency

Author

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  • Junghum Park

    (Lietuvos Bankas, Vilnius University)

Abstract

This paper studies the interdependence of myopic corporate behavior and the so-called feedback effect, where financial prices contain useful information for corporate decision making. We model the feedback effect in a mostly standard trading environment, except that its tractable analysis is ensured by Pareto distribution of productivity. The analysis shows that the feedback effect causes a price inflation and the resulting long-term productive inefficiency, which can be understood in the context of innovation strategies. It sheds light on the negative side of learning from financial prices, and, at the same time, explains its prevalence, which requires the availability of superior information in financial markets.

Suggested Citation

  • Junghum Park, 2026. "Feedback Effects, Market Valuations, and Real Efficiency," Bank of Lithuania Working Paper Series 143, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:143
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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