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The paper provides empirical evidence on the effect of strategic complementarities on investors' behavior in financial markets. We derive empirical implications from a global-game model and test them using data on mutual fund outflows. Consistent with the theory, we find that in funds with illiquid assets (where complementarities are stronger), outflows are more sensitive to bad past performance than in funds with liquid assets; we also find that investors' behavior depends on the composition of the shareholder base. We present further evidence that these results are not attributable to alternative explanations that are based on information conveyed by past performance or on clientele effects. Overall, our empirical findings suggest that strategic complementarities amplify the response of investors to fundamentals and generate financial fragility.

Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect"). Our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: They impose discipline on managers by triggering takeover threats.DOES A LOW MARKET valuation make a firm a takeover target? In theory, if acquisition prices are related to market prices, acquirers can profit from taking over a firm whose market value is low relative to its peers-due either to mispricing or mismanagement-and restore it to its potential. Indeed, in practice, acquirers and other investors appear to track a firm's valuation multiples for indications on the potential for acquisition, and managers strive to maintain high market valuations to prevent a hostile takeover. Understanding whether such a link exists is important because, if so, this would suggest that the market is not a sideshow, but rather exerts a powerful disciplinary effect on firm management (as suggested by Marris (1964), Manne (1965), andJensen (1993)).Despite the above logic, existing empirical studies on takeovers fail to systematically uncover a meaningful relationship between market valuations * Edmans is from The Wharton School, University of Pennsylvania, NBER, and ECGI. Goldstein is from The Wharton School, University of Pennsylvania. Jiang is from Columbia Business School. For helpful comments and discussions, we thank the Editor (Cam Harvey), two anonymous referees, an Associate Editor, Jack Bao, Thomas Bates, Jonathan Berk, Philip Bond, Jess Cornaggia, Todd Gormley, Dirk Hackbarth, Ayla Kayhan, Alexander Ljungqvist, Ernst Maug, Konrad Menzel, Randall Morck, Stew Myers, Lalitha Naveen, Gordon Phillips, Michael Roberts, Jacob Sagi, Jeremy Stein, and seminar participants at Columbia, Drexel, Georgia State, HBS, HEC Paris, HKUST, Houston, Mannheim, MIT Sloan, SUNY Binghamton, Temple, Tilburg, UNC, UT Dallas, Yale, AFA, Caesarea Center Conference, FIRS, LSE Paul Woolley Center Conference, NBER, the UBC Summer Conference, and the Washington University Conference on Corporate Finance. Robert Ready and Carrie Wu provided valuable research assistance. Edmans gratefully acknowledges the Goldman Sachs Research Fellowship from the Rodney White Center for Financial Research. This paper was previously circulated under the title "Takeover Activity and Target Valuations: Feedback Loops in Financial Markets." 934The Journal of Finance R and takeover probabilities. While Cremers, Nair, and John (2009) and Bates, Becher, and Lemmon (2008) find a negative (but economically insignificant) relation between takeover...

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It is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources. This paper identifies a limitation inherent in this role of prices. It shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm's stock. When this happens the informativeness of the stock price decreases, and the beneficial allocational role of the financial market weakens. The trader profits from this trading strategy, partly because his trading distorts the firm's investment. We therefore refer to this strategy as "manipulation". We show that trading without information is profitable only with sell orders, driving a wedge between the allocational implications of buyer and seller initiated speculation, and providing justification for restrictions on short sales. Copyright 2008 The Review of Economic Studies Limited.

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