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Passive Investing and the Rise of Mega-Firms

Author

Listed:
  • Hao Jiang
  • Dimitri Vayanos
  • Lu Zheng

Abstract

We study how passive investing affects asset prices. Flows into passive funds raise disproportionately the stock prices of the economy’s largest firms, and especially those large firms that the market overvalues. These effects are sufficiently strong to cause the aggregate market to rise even when flows are entirely due to investors switching from active to passive. Our results arise because flows create idiosyncratic volatility for large firms, which discourages investors from correcting the flows’ effects on prices. Consistent with our theory, the largest firms in the S&P500 experience the highest returns and increases in volatility following flows into that index.

Suggested Citation

  • Hao Jiang & Dimitri Vayanos & Lu Zheng, 2020. "Passive Investing and the Rise of Mega-Firms," NBER Working Papers 28253, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28253
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    Cited by:

    1. is not listed on IDEAS
    2. Fernando Broner & Juan J. Cortina & Sergio L. Schmukler & Tomas Williams, 2026. "Demand Shocks in Equity Markets and Firm Responses," Mo.Fi.R. Working Papers 196, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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