The Impact of Passive Investing on Corporate Valuations

22 Pages Posted: 5 Mar 2011 Last revised: 8 Aug 2011

See all articles by Eric Belasco

Eric Belasco

Texas Tech University

Michael S. Finke

The American College

David Nanigian

California State University, Fullerton - Department of Finance

Date Written: August 1, 2011

Abstract

Over the past 20 years, a trend toward index fund investing has emerged. Currently, more mutual fund assets are indexed to the S&P 500 than any other index. Prior research on downward-sloping demand curves suggests that widespread acceptance of S&P 500 index investing may push prices of companies in the S&P 500 beyond fundamental values. This paper explores the impact of flows into S&P 500 index funds on corporate valuations. The results show that money flow into S&P 500 index funds is inflating the values of companies in the index relative to those outside of the index.

Keywords: Active management, passive management, indexing, index fund, index premium, demand curves for stocks, S&P 500

JEL Classification: G11, G12, G23

Suggested Citation

Belasco, Eric and Finke, Michael S. and Nanigian, David, The Impact of Passive Investing on Corporate Valuations (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1769220 or http://dx.doi.org/10.2139/ssrn.1769220

Eric Belasco

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

David Nanigian (Contact Author)

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

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