When Economic and Financial Value Diverge

For a number of reasons, financial value can be well above, or well below, economic value. During the great bubble, financial values became enormously inflated compared to economic values, and when that was finally realized by investors, financial values collapsed well below the economic values

Figure 4-3 (The Bubble Curve) illustrates the divergence of economic and financial value for a single start-up. While the company is slowly building economic value, the financial markets accord it increasingly large financial value. Expectations far outrun actual performance. Then suddenly the financial markets realize their mistake, and the financial value of the firm comes tumbling down. As it overshot in the ...

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