Extrinsic Value

This Article explores the concept of “extrinsic value” for stocks. While classic finance theory holds that demand for a firm’s stock is perfectly elastic, this view of the stock market is increasingly false. The modern stock market is much more like other markets than purists might think, subject to the vagaries and whims of demand.Under this Article’s proposed framework, extrinsic value—in essence, a demand premium—is a key component of a new “value triad.” In this triad, stock derives value from three distinct sources: extrinsic value (demand-driven factors), intrinsic value (firm fundamentals), and control. This Article provides an initial exploration of extrinsic value and its implications for stock market pricing.Once extrinsic value is acknowledged, numerous puzzling market anomalies suddenly make sense. Meme stocks, multiplier effects, index premia, the emergence of ESG as a distinct asset class, and investor “perks” of trivial value all fit uneasily within the orthodox paradigm but are easily explained in a world of demand-driven prices