The Benchmark Inclusion Subsidy

Anil Kashyap, Natalia Kovrijnykh (), Jian Li and Anna Pavlova

No 25337, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G23 G31 G32 (search for similar items in EconPapers)
Date: 2018-12
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Anil K Kashyap & Natalia Kovrijnykh & Jian Li & Anna Pavlova, 2021. "The benchmark inclusion subsidy," Journal of Financial Economics, vol 142(2), pages 756-774.

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Related works:
Journal Article: The benchmark inclusion subsidy (2021)
Working Paper: The Benchmark Inclusion Subsidy (2018)
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