More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency

62 Pages Posted: 30 Jun 2020

See all articles by Adrian Buss

Adrian Buss

INSEAD - Finance; Centre for Economic Policy Research (CEPR)

Savitar Sundaresan

Imperial College Business School

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Date Written: May 31, 2020

Abstract

We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive ownership lowers the cost of capital, encouraging firms to invest more aggressively in risky growth opportunities. The resultant higher cash flow volatility induces active investors to acquire more information, implying higher price informativeness for firms with high passive ownership. These firms also have higher stock prices and higher stock-return variances. In aggregate, a rise in passive ownership can also improve informational efficiency if uninformed investors are crowded out. We document that our mechanism applies more generally to benchmarked institutional investors.

Keywords: passive investing, informational efficiency, risk taking, asset allocation, asset pricing

JEL Classification: G11, G14, G23

Suggested Citation

Buss, Adrian and Sundaresan, Savitar, More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency (May 31, 2020). Available at SSRN: https://ssrn.com/abstract=3615173 or http://dx.doi.org/10.2139/ssrn.3615173

Adrian Buss (Contact Author)

INSEAD - Finance ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Savitar Sundaresan

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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