On Index Investing

61 Pages Posted: 20 Oct 2017 Last revised: 1 Mar 2022

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: January 1, 2022

Abstract

We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An exogenous increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. These findings are consistent with an equilibrium in which investors choose to gather private information whenever it is profitable. As index investing increases, there are fewer privately-informed active investors (so overall information production drops), but the remaining mix of investors adjusts until the returns to active investing are unchanged. As a result, passive investing does not undermine price efficiency.

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 (January 1, 2022). 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

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