Feedback Between the Financial Market and the Product Market

Financial markets aggregate information about firm profitability. However, consumers, a key driver of profitability, may react to information coming from markets. This creates a feedback effect. We examine a model in which information from financial markets may push consumers to act uniformly, eliminating gains from speculation and pushing the stock price away from fundamentals. Firm disclosure may reduce the firm's power to set product prices - thus creating incentives for misreporting. Speculators may benefit from firm disclosure, providing incentives for them to engage in activism