On Index Investing

53 Pages Posted: 20 Oct 2017 Last revised: 28 Aug 2020

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Davidson Heath

University of Utah - David Eccles School of Business

Matthew C. Ringgenberg

University of Utah - Department of Finance

Date Written: August 23, 2020

Abstract

We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. The findings are consistent with an equilibrium in which investors choose to be informed active traders whenever it is profitable. As index investing increases there are fewer informed active investors (so aggregate information production drops), but the remaining mix of informed and uninformed active investors adjusts until the returns to active investing are unchanged -- thus price informativeness is unchanged.

Keywords: active management, arbitrageurs, index investing, limits to arbitrage, market efficiency, passive investing

JEL Classification: G12, G14

Suggested Citation

Coles, Jeffrey L. and Heath, Davidson and Ringgenberg, Matthew C., On Index Investing (August 23, 2020). Available at SSRN: https://ssrn.com/abstract=3055324 or http://dx.doi.org/10.2139/ssrn.3055324

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Davidson Heath

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
758
Abstract Views
3,653
rank
41,476
PlumX Metrics