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

Author

Listed:
  • Lubos Pastor

    (University of Chicago)

  • Taisiya Sikorskaya

    (University of Chicago)

  • Jinrui Wang

    (University of Chicago)

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.

Suggested Citation

  • Lubos Pastor & Taisiya Sikorskaya & Jinrui Wang, 2026. "The Hidden Cost of Stock Market Concentration: When Funds Hit Regulatory Limits," Working Papers 2026-51, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2026-51
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    References listed on IDEAS

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    More about this item

    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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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