Review of Financial Studies Vol. 36 No. 12 2023
More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency
Abstract
We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive investors’ inelastic demand lowers a firm’s cost-of-capital, inducing it to take more risk. The higher cash flow variance, in turn, incentivizes active investors to acquire more precise private information, pushing up price informativeness for firms with high passive ownership. High passive ownership also implies higher stock prices and higher stock-return variances. An increase in the aggregate size of passive investors amplifies these cross-sectional differences. We also document complementarities in firms’ real investment and investors’ information choices that can cause information crashes. Received May 31, 2020; editorial decision January 4, 2023 by Editor Holger Mueller.
- DOI
- 10.1093/rfs/hhad046
- Volume
- 36
- Issue
- 12
- Pages
- 4713-4758
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref