Passive Ownership and Market Efficiency

77 Pages Posted: 27 Nov 2018 Last revised: 24 Feb 2019

Date Written: February 22, 2019


I document new stylized facts on a decrease in pre-earnings announcement price informativeness. Between 1990 and 2017, pre-earnings cumulative abnormal trading volume declined 10% and the pre-earnings drift declined 22%. Further, earnings days now account for 17% of total annual volatility, up from 3% in 1990. At the firm-level, increases in passive ownership can explain up to 76% of the decline in pre-earnings volume, 20% of the decline in the pre-earnings drift, and 14% of the increase in volatility on earnings days. These results are robust to using only quasi-exogenous variation in passive ownership that arises from S&P 500 index addition, and Russell 1000/2000 index reconstitution. One explanation for decreased efficiency is that passive managers lack strong incentives to gather and consume firm-specific information. Consistent with this mechanism, increases in passive ownership are correlated with fewer analysts covering a stock, decreased analyst accuracy, and fewer downloads of SEC filings.

Keywords: Passive Ownership, ETFs, Market Efficiency

JEL Classification: G12, G14

Suggested Citation

Sammon, Marco, Passive Ownership and Market Efficiency (February 22, 2019). Available at SSRN: or

Marco Sammon (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States


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