Abstract We document how mechanical buying by CRSP-index-tracking funds 5 days post-IPO affects stock returns and IPO deal structure. Using a difference-in-differences design, we show that expected indexer demand causes Fast-Track IPOs to outperform their non-Fast-Track counterparts by over five percentage points, peaking at the index inclusion date and reverting significantly within 3 weeks. Anticipated CRSP index inclusion also affects IPO terms, with Fast-Track IPOs raising 6% more capital than their non-Fast-Track counterparts. Our findings support a proposed index rule change to eliminate a $5.8 billion “shadow tax” paid to intermediaries by index fund investors and firms raising capital through IPOs. (JEL G12, G14)

Abstract We find that firms are the primary sellers who clear the market for index fund buying, providing shares at a nearly one-for-one rate. Most demand-side institutions trade in the same direction as index funds rather than accommodating passive demand. We use two instruments for index fund demand and show that firms causally respond to exogenous passive demand, with prices serving as the coordinating mechanism. Firms satisfy passive demand mostly through nonprimary market issuance, for example, through employee stock-based compensation. Our results suggest that passive investing has systematically supplied capital to firms by enabling equity issuance over the last two decades.

ABSTRACT The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade. This has occurred despite a significant increase in the share of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns during the 1990s but an average return of only 0.1% between 2010 and 2020. We investigate the drivers of this phenomenon and discuss implications for market efficiency. We document a similar decline in the index effect among other families of indices.

Retail investors trade hard-to-value stocks. We document a large and persistent spread in the stock-level intensity of retail trading, even allowing for known biases in the attribution of retail trades. Stocks with a high share of retail-initiated trades exhibit higher shares of intangible capital, longer duration cash flows, and a higher likelihood of being mispriced. Consistent with retail-favored stocks being harder to value, we document that these stocks are less sensitive to earnings news and more sensitive to retail order imbalances. Such segmentation of trading intensity arises in a model where informed investors face a trade-off between the benefits of hiding their trades within noisy retail investor order flow and the costs of producing information about the fundamentals of hard-to-value stocks.

Each time a stock gets added to or dropped from an index, we ask: “How much money would have to be tracking that index to explain the huge spike in rebalancing volume we observe on reconstitution day?” While index funds held 16% of the US stock market in 2021, we put the overall passive ownership share at 33.5%. Our headline number is twice as large because it reflects index funds as well as other kinds of passive investors, such as institutional investors with internally managed index portfolios and active managers who are closet indexing.

Abstract No previous infectious disease outbreak, including the Spanish Flu, has affected the stock market as forcefully as the COVID-19 pandemic. In fact, previous pandemics left only mild traces on the U.S. stock market. We use text-based methods to develop these points with respect to large daily stock market moves back to 1900 and with respect to overall stock market volatility back to 1985. We also evaluate potential explanations for the unprecedented stock market reaction to the COVID-19 pandemic. The evidence we amass suggests that government restrictions on commercial activity and voluntary social distancing, operating with powerful effects in a service-oriented economy, are the main reasons the U.S. stock market reacted so much more forcefully to COVID-19 than to previous pandemics in 1918–1919, 1957–1958, and 1968.