The Real Cost of Benchmarking

50 Pages Posted: 11 Jul 2024

See all articles by Christian Kontz

Christian Kontz

Stanford Graduate School of Business

Sebastian Hanson

Stanford Graduate School of Business; Stanford University, Graduate School of Business, Students

Date Written: July 02, 2024

Abstract

This paper documents a novel channel through which the benchmarking of fund managers affects firm behavior. Using a difference-indifferences design, we show that increases in a stock's benchmarking intensity cause its CAPM β to rise. Stocks with a benchmarking intensity increase of more than 5 percentage points due to index inclusion subsequently have 15% higher CAPM βs. These changes in CAPM βs are not driven by changes in firm fundamentals and persist for at least seven years. Using an instrumental variable design, we find that firms with higher CAPM βs due to index inclusion reduce investment and have 7.1% less physical capital after six years. Instead of investing, these firms hold more cash and gradually increase payouts to shareholders. Consistent with this mechanism, we show that increasing benchmarking intensity predicts a higher perceived cost of capital by firm managers. From 2000 to 2016, increases in CAPM βs due to higher benchmarking caused a 7.6% reduction in capital accumulation at the aggregate level. Our findings highlight the significant influence of fund manager benchmarking on firm behavior and real quantities through changes in the perceived cost of capital.

Keywords: Beta, Capital Allocation, CAPM, Cost of Capital, Index Inclusion, Investment, Investment Shortfall, Misallocation, Missing Investment, Benchmarking, Russell

JEL Classification: D2, E22, G11, G23, G31

Suggested Citation

Kontz, Christian and Hanson, Sebastian, The Real Cost of Benchmarking (July 02, 2024). Available at SSRN: https://ssrn.com/abstract=4884602 or http://dx.doi.org/10.2139/ssrn.4884602

Christian Kontz (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Sebastian Hanson

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
16
Abstract Views
74
PlumX Metrics