The Real Cost of Benchmarking
with Sebastian Hanson
Abstract:
This paper provides causal evidence that benchmarking-induced asset price distortions have real effects on corporate investment. We exploit exogenous variation in stocks' benchmarking intensity around Russell index reconstitutions to establish causality. We find that increased exposure to benchmark-linked capital flows causes stocks' CAPM β to rise. Firm managers perceive this as an increase in their cost of capital and reduce investment. Treated firms have 7.1% less physical and 8.4% less intangible capital after six years. At the aggregate level, the asset price distortions caused by benchmarking can explain 10.7% lower capital accumulation from 2000 to 2016. Our findings highlight how benchmark-linked investing affects capital allocation in the real economy.
[Draft]
[SSRN]
[BibTex]
Presentations:
AFA Meeting 2025*,
GEA Winter Meeting 2024 (CESifo)*,
Macro Finance Research Program (MFR) 2024 Summer Session for Young Scholars, Inter-Finance PhD Seminar
(* scheduled)
(* scheduled)