Passive Investing and the Rise of Mega-Firms

64 Pages Posted: 20 Jan 2021 Last revised: 5 Oct 2022

See all articles by Hao Jiang

Hao Jiang

Michigan State University

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: August 26, 2022

Abstract

We study how passive investing affects asset prices. Flows into passive funds raise dispropor- tionately the stock prices of the economy’s largest firms—even when the indices tracked by the funds include all firms. Passive flows also raise the largest firms’ return volatility the most, and raise the aggregate stock market even when they are entirely due to investors switching from active to passive. These effects arise because of the re-pricing of systematic and large firms’ idiosyncratic risk. We estimate that passive investing caused the 50 largest US firms to rise 30% more than the US stock market over 1996–2020.

Keywords: passive investing, fund flows, asset pricing, size distribution of firms

JEL Classification: G10, G11, G12, G23

Suggested Citation

Jiang, Hao and Vayanos, Dimitri and Zheng, Lu, Passive Investing and the Rise of Mega-Firms (August 26, 2022). Available at SSRN: https://ssrn.com/abstract=3749534 or http://dx.doi.org/10.2139/ssrn.3749534

Hao Jiang (Contact Author)

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Dimitri Vayanos

London School of Economics ( email )

A350
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London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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