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

Adrian Buss and Savitar Sundaresan

No 14843, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive investors' inelastic demand lowers a firm's cost-of-capital, inducing it to take more risk. The higher cash flow variance, in turn, incentivizes active investors to acquire more precise private information, pushing up price informativeness for firms with high passive ownership. High passive ownership also implies higher stock prices and higher stock-return variances. An increase in the aggregate size of passive investors amplifies these cross-sectional differences. We also document complementarities in firms' real-investment and investors' information choices that can cause information crashes.

Keywords: Passive investing; Informational efficiency; Risk taking; Asset allocation; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (5)

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