Passive Investing and the Rise of Mega-Firms
64 Pages Posted: 20 Jan 2021 Last revised: 5 Oct 2022
Date Written: August 26, 2022
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: Suggested Citation