Index Investing and Corporate Investment-Price Sensitivity

42 Pages Posted: 2 Apr 2020

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Ha Diep-Nguyen

Indiana University, Kelley School of Business

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Date Written: March 16, 2020

Abstract

Firm investment-stock price sensitivity declines once they join the S&P500 index, consistent with the hypothesis that index membership undermines managers’ abilities to learn from stock prices. To alleviate endogeneity concerns, we examine the investment sensitivity of non-index firms to the stock prices of peer firms that join the index. We find that investment sensitivity to peer-price also declines around peer S&P500 adoption. The results are concentrated in later years when passive investing rose to prominence, as well as when the (indexed) peer’s passive ownership is higher. The learning channel is supported by stronger results when peer price informativeness is lower, and also by weaker results when the focal firm manager is relatively more informed.

Keywords: Indexing, Investment-Price Feedback, Stock Price Informativeness

Suggested Citation

Billett, Matthew T. and Nguyen, Ha and Garfinkel, Jon A., Index Investing and Corporate Investment-Price Sensitivity (March 16, 2020). Kelley School of Business Research Paper No. 2020-65. Available at SSRN: https://ssrn.com/abstract=3555397 or http://dx.doi.org/10.2139/ssrn.3555397

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Ha Nguyen

Indiana University, Kelley School of Business ( email )

1309 E 10th street
Bloomington, IN 47405-1701
United States

Jon A. Garfinkel (Contact Author)

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

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