Competing for Stock Market Feedback∗

We propose a model where financial markets provide useful information to decision makers, leading firms to compete to attract informed trading. Firms increase managerial risk taking to compete for market information, creating a rat race where firms overinvest in a (failed) attempt to increase their stock informativeness. Efficiency gains of learning from the market may be eliminated: There is always an equilibrium where financial markets provide useful information, but are completely ignored by firms. Moreover, in any equilibrium firms react too little to market activity. Our results highlight that critically different outcomes arise when firms interact in integrated financial markets.