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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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8

Speculation and the Allocative Performance of Financial Markets

FINANCIAL MARKETS provide assessments of the relative prospects of companies' assets. They set prices to reflect the stream of expected future returns on past investments, as well as that of new investment projects for which financing is being sought. Markets allocate capital based on these price signals: the higher the price of a company's assets, the easier it is for it to attract financial capital, whereas lower prices make financing more difficult. For markets to perform this allocative function well, participants' decisions to, say, buy and sell shares of particular companies should reflect changes in the relative prospects of companies or projects and the risks associated ...

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