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On index investing

Author

Listed:
  • Coles, Jeffrey L.
  • Heath, Davidson
  • Ringgenberg, Matthew C.

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.

Suggested Citation

  • Coles, Jeffrey L. & Heath, Davidson & Ringgenberg, Matthew C., 2022. "On index investing," Journal of Financial Economics, Elsevier, vol. 145(3), pages 665-683.
    • Handle: RePEc:eee:jfinec:v:145:y:2022:i:3:p:665-683
    DOI: 10.1016/j.jfineco.2022.05.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Index investing; Information production; Market efficiency; Passive investing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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