The benchmark inclusion subsidy

Anil K Kashyap, Natalia Kovrijnykh, Jian Li and Anna Pavlova

Journal of Financial Economics, 2021, vol. 142, issue 2, 756-774

Abstract: We argue that the pervasive practice of evaluating portfolio managers relative to a benchmark has real effects. Benchmarking generates additional, inelastic demand for assets inside the benchmark. This leads to a “benchmark inclusion subsidy:” a firm inside the benchmark values an investment project more than the one outside. The same wedge arises for valuing M&A, spinoffs, and IPOs. This overturns the proposition that an investment’s value is independent of the entity considering it. We describe the characteristics that determine the subsidy, quantify its size (which could be large), and identify empirical work supporting our model’s predictions.

Keywords: Project valuation; Investment; Mergers; Asset management; Benchmark (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 G32 G34 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: The Benchmark Inclusion Subsidy (2018)
Working Paper: The Benchmark Inclusion Subsidy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:756-774

DOI: 10.1016/j.jfineco.2021.04.021

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