Passive Ownership and Price Informativeness
52 Pages Posted: 27 Nov 2018 Last revised: 15 Nov 2021
Date Written: November 12, 2021
How does passive ownership affect the incorporation of information into stock prices? Motivated by two canonical models, I propose three new empirical measures of price informativeness. I find average price informativeness declined over the past 30 years and passive ownership is negatively correlated with price informativeness. To establish causality, I show that price informativeness decreases after quasi-exogenous increases in passive ownership arising from index additions and rebalancing. Finally, I provide evidence for a mechanism: investors expend less effort gathering information about stocks with a larger fraction of passive owners.
Keywords: Passive Ownership, ETFs, Market Efficiency
JEL Classification: G12, G14
Suggested Citation: Suggested Citation