The rise of stock indexing has raised concerns that index investing impedes arbitrage and degrades price discovery. This article uses Russell’s reconstitution to identify the causal effect of index investing on information arbitrage and price discovery. Although index investing has no discernible effect on the ability of arbitrageurs to trade and impound news into the prices of large- and mid-cap stocks, we find that index investing increases the speed of price adjustment to news for micro-cap stocks. Our causal evidence identifies the relaxation of arbitrage constraints as a mechanism through which indexing facilitates informed trading for more arbitrage-constrained micro-cap stocks.

We study the implications of inflation heterogeneity for individuals and firms through the lens of accounting research, applying measurement frameworks to the national accounting measurement of inflation. We first examine the systematic exposure of individuals in low‐income households to higher inflation relative to those in high‐income households. We show that this “inflation gap” is linked with future rising inequality in the form of widening gaps in healthcare insurance, education, homeownership, and credit card debt, as well as in a higher frequency of property crimes. We also provide an economic mechanism connecting the inflation gap with rising inequality, empirically demonstrating the role of basic goods in reducing the ability of individuals in the low‐income group to attain the social and economic implications that we study. In addition, we show a channel that connects the inflation gap to firms' profitability. Indeed, consistent with the inflation gap disadvantaging low‐income households mainly through basic goods, the inflation gap fluctuations are especially strongly connected to the profitability of firms operating in the energy and consumer staples sectors. Finally, we find that market power plays a role in this connection, where this link is even stronger for firms with high market power. Taking its findings together, the paper shows that differential inflation pressures have major implications for household well‐being and corporate profitability.

Using SASB’s materiality framework, prior research finds alpha for the portfolio of firms with improving ratings on material ESG issues. We replicate this finding and provide a fundamentals-based perspective on why the materiality portfolio outperforms. Our basic premise is that changes in material ESG issues reflect fundamental firm characteristics. More financially established firms—firms with larger size, lower growth, and higher profitability relative to their sector—are more likely to not only create material strengths but also resolve material weaknesses in their ESG scoring. This fundamental link dictates that one should comprehensively control for fundamental determinants of stock returns before attributing portfolio outperformance to improving material ESG scores. Indeed, we find that the materiality portfolio does not generate alpha after we account for its exposure to profitability and growth factors. Our evidence underscores the issue of correlated omitted fundamental factors in the debate of ESG alpha. Data Availability: Data are available from the sources cited in the text.

Although activist short sellers can play a crucial role in fraud detection, they have come under scrutiny following accusations of systematically disseminating false negative information. We develop a framework delineating the roles of campaign-specific private information quality and short-selling dynamics in shaping disclosure incentives. We predict that the act of disclosure combined with pre-disclosure stock lending dynamics is informative about the quality of an activist’s private information. We find that increased pre-disclosure shorting intensity is associated with more negative post-disclosure returns, adverse media coverage, and consequential campaign outcomes, including auditor turnover, accounting restatements, class-action lawsuits, and performance-related delistings. Furthermore, elevated short-selling costs and risks magnify the association between pre-disclosure shorting intensity and post-disclosure underperformance. Finally, we examine V-shaped reversals and short covering following activists’ disclosures and find no evidence of systematic manipulation. We conclude that activists disclosing fraud allegations under their own names are discouraged from engaging in “short-and-distort” schemes. Data Availability: Data are available from the sources cited in the text.