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

65 Pages Posted: 16 Jun 2020

See all articles by Adrian Buss

Adrian Buss

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

Savitar Sundaresan

Columbia University

Multiple version iconThere are 2 versions of this paper

Date Written: June 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: asset allocation, Asset Pricing, Informational efficiency, passive investing, Risk Taking

JEL Classification: G11, G14, G23

Suggested Citation

Buss, Adrian and Sundaresan, Savitar, More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency (June 2020). CEPR Discussion Paper No. DP14843, Available at SSRN: https://ssrn.com/abstract=3628163

Adrian Buss (Contact Author)

INSEAD - Finance ( email )

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HOME PAGE: http://sites.google.com/view/abuss

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Savitar Sundaresan

Columbia University

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