Index Investing and Corporate Investment-Price Sensitivity
42 Pages Posted: 2 Apr 2020
Date Written: March 16, 2020
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
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