We study the impact of index investing on firm performance by examining the link between commodity indices and firms that use index commodities. Around 2004, commodity index investing dramatically increased. This event is referred to as the financialization of commodity markets. Following financialization, firms that use index commodities make worse production decisions, earn 40% lower profits, and have 6% higher costs. Consistent with a feedback channel in which market participants learn from prices, our results suggest that index investing distorts the price signal, thereby generating a negative externality that impedes firms’ ability to make production decisions. Received March 31, 2017; editorial decision July 5, 2018 by Editor Itay Goldstein.