On index investing

Jeffrey L. Coles, Davidson Heath and Matthew Ringgenberg

Journal of Financial Economics, 2022, vol. 145, issue 3, 665-683

Abstract: We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An exogenous increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. These findings are consistent with an equilibrium in which investors choose to gather private information whenever it is profitable. As index investing increases, there are fewer privately-informed active investors (so overall information production drops), but the mix of investors adjusts until the returns to active investing are unchanged. As a result, passive investing does not undermine price efficiency.

Keywords: Index investing; Information production; Market efficiency; Passive investing (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:3:p:665-683

DOI: 10.1016/j.jfineco.2022.05.007

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