The Hidden Cost of Stock Market Concentration: When Funds Hit Regulatory Limits

Lubos Pastor, Taisiya Sikorskaya and Jinrui Wang

No 35007, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As stock market concentration has risen, regulatory limits on fund portfolio concentration have become increasingly binding, especially for large-cap growth funds. When funds approach these limits, they trim their largest holdings and reduce equity exposure. Funds perform worse when constrained. A constraint-based ownership measure predicts stock returns, particularly among the largest firms. These findings suggest that high market concentration can distort stock prices by limiting the ability of optimistic investors to scale their positions. Just like short-sale constraints can produce overpricing by limiting pessimistic investors' views, constraints on long positions can generate underpricing by suppressing optimists' views.

JEL-codes: G12 G14 G23 G28 (search for similar items in EconPapers)
Date: 2026-03
Note: AP
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