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Chapter 4. Inflating the Bubble: the Fin... > The Financial Value Chain

The Financial Value Chain

The economic value that a company creates by producing and/or marketing goods and services does not automatically translate into financial value—the market value of its shares. The translation from one to the other is the role of a different set of institutions in our economy—including, in addition to others, banks, venture funds, and brokerage houses. This group of financial institutions constitutes the financial value chain. It's the mechanism by which the great Internet bubble was born, and the mechanism by which it died.

The system of specialized institutions and professionals who make up the financial value chain work to convert the economic value of a firm into financial value. Economic value doesn't transfer directly in the short-run into financial value, as theorists who believe in perfect markets predict, and ironically, for the very reason they focus on—that the transfer of the economic value of a firm into financial value requires a market, which makes the transfer subject to all the emotions and inefficiencies of all markets, at least in the short run.


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