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George-Marios Angeletos, Guido Lorenzoni, Alessandro Pavan, Wall Street and Silicon Valley: A Delicate Interaction, The Review of Economic Studies, Volume 90, Issue 3, May 2023, Pages 1041–1083, https://doi.org/10.1093/restud/rdac043
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Abstract
Entrepreneurs and venture capitalists are concerned about investors’ beliefs in asset markets because these beliefs shape the value of a potential IPO and the possibility to expand. Investors’ beliefs, on the other hand, can be influenced by start-up activity insofar as the latter contains valuable information about eventual profitability. This two-way feedback is shown to generate excessive, non-fundamental, waves in start-up activity, IPOs, and asset prices. Policies that “lean against the wind” can improve welfare, without requiring an informational advantage by the government.