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
Date Written: December 15, 2019
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: Suggested Citation