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The Benchmark Inclusion Subsidy

Resource type
Authors/contributors
Title
The Benchmark Inclusion Subsidy
Abstract
We argue that the pervasive practice of evaluating portfolio managers relative to a benchmark has real effects. Benchmarking generates additional, inelastic demand for assets inside the benchmark. This leads to a “benchmark inclusion subsidy:” a firm inside the benchmark values an investment project more than the one outside. The same wedge arises for valuing M&A, spinoffs, and IPOs. This overturns the proposition that an investment’s value is independent of the entity considering it. We describe the characteristics that determine the subsidy, quantify its size (which could be large), and identify empirical work supporting our model’s predictions.
Publication
Journal of Financial Economics
Volume
142
Issue
S0304405X21001513
Pages
756-774
Date
2021
Citation
Kashyap, A. K., Kovrijnykh, N., Li, J., & Pavlova, A. (2021). The Benchmark Inclusion Subsidy. Journal of Financial Economics, 142, 756–774.
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