We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which news events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content.

Consider the postage stamp. As title to a future good (or, in this case, service) with monetary value, this humble object is essentially the same as a security. Its value, 37 cents, can be identiÞed with the present value of the service (delivery of a letter) to which its owner is entitled.

The canonical model in economics considers people to be rational and self-regarding. ‘‘

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Much of capital market research in accounting over the past 20 years has assumed that the price adjustment process to information is instantaneous and/or trivial. This assumption has had an enormous influence on the way we select research topics, design empirical tests, and interpret research findings. In this discussion, I argue that price discovery is a complex process, deserving of more attention. I highlight significant problems associated with a na.ıve view of market efficiency, and advocate a more general model involving noise traders. Finally, I discuss the implications of recent evidence

Much of capital market research in accounting over the past 20 years has assumed that the price adjustment process to information is instantaneous and/or trivial. This assumption has had an enormous influence on the way we select research topics, design empirical tests, and interpret research findings. In this discussion, I argue that price discovery is a complex process, deserving of more attention. I highlight significant problems associated with a na.ıve view of market efficiency, and advocate a more general model involving noise traders. Finally, I discuss the implications of recent evidence

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Financial vs. Strategic Buyers

Equity overvaluation is thought to create the potential for manager misbehavior, while monitoring and corporate governance curb misbehavior. Thus, the effects of corporate governance should be greatest when firms become overvalued. We test this simple yet powerful idea. Using proxies of price deviations from fundamentals and standard measures of corporate governance we demonstrate that firm performance seems most impacted by governance when price deviations are high. Our findings suggest that misvaluation may modulate the fundamental governance relationship between shareholders and CEOs. At least since Keynes (1936) economists have argued that stocks can get irrationally priced and that this divergence from fundamental value may impact managerial decisions. 1 For example, an executive whose company is currently undervalued has less ability, need or even desire to misbehave by distorting investment, smoothing earnings, working less, or taking on pet projects. On the other hand, overvaluation may help hide misbehavior, create the need to manipulate information, or create the incentive to focus on the short