Working Paper: CEPR ID: DP14843
Authors: Adrian Buss; Savitar Sundaresan
Abstract: We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive investors' inelastic demand lowers a firm's cost-of-capital, inducing it to take more risk. The higher cash flow variance, in turn, incentivizes active investors to acquire more precise private information, pushing up price informativeness for firms with high passive ownership. High passive ownership also implies higher stock prices and higher stock-return variances. An increase in the aggregate size of passive investors amplifies these cross-sectional differences. We also document complementarities in firms' real-investment and investors' information choices that can cause information crashes.
Keywords: passive investing; informational efficiency; risk taking; asset allocation; asset pricing
JEL Codes: G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| passive ownership (G32) | cost of capital (G31) |
| cost of capital (G31) | risk-taking (D81) |
| risk-taking (D81) | cash flow variance (F32) |
| cash flow variance (F32) | active investor information acquisition (G24) |
| active investor information acquisition (G24) | price informativeness (G14) |
| passive ownership (G32) | risk-taking (D81) |
| passive ownership (G32) | cash flow variance (F32) |
| passive ownership (G32) | active investor information acquisition (G24) |
| passive ownership (G32) | price informativeness (G14) |
| passive ownership (G32) | stock prices (G12) |
| passive ownership (G32) | stock-return variances (G17) |