Active Investing and the Efficiency of Security Markets

The Journal of Investment Management, 2020, Forthcoming

25 Pages Posted: 9 Apr 2019 Last revised: 16 Dec 2019

See all articles by Russ Wermers

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: December 15, 2019

Abstract

This study investigates the impact of active investment management on the efficiency of public security markets. The scholarly literature indicates that active management contributes to market efficiency, thereby providing positive externalities for all investors, including investors in passively-managed funds. Contrary to popular interpretations of Sharpe’s (1991) “active arithmetic,” the benefits of active management are amplified in small- and mid-capitalization U.S. stocks, enhancing the ability of these companies to raise capital for investments in the real economy. Across all public corporations, the improved efficiency afforded by active management helps to discipline capital expenditures by corporations through a more efficient stock price.

Keywords: active management, index funds, passive management, market efficiency

JEL Classification: G23, G14

Suggested Citation

Wermers, Russell R., Active Investing and the Efficiency of Security Markets (December 15, 2019). The Journal of Investment Management, 2020, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3353956 or http://dx.doi.org/10.2139/ssrn.3353956

Russell R. Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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