This paper provides causal evidence that asset price distortions induced by benchmarking have real effects on corporate investment. We document that the rise in benchmark-linked investing over the past two decades fundamentally changed the cross-section of stocks' CAPM βs. To establish causality, we exploit exogenous variation in benchmarking intensity generated by Russell index reconstitutions. Upon inclusion in benchmark indices, stocks experience an increase in CAPM βs, with larger effects observed among stocks subject to greater increases in benchmarking intensity. The cross-sectional changes in CAPM βs correlate with net flows into passive funds. Firm managers interpret the resulting higher CAPM β as an increase in their firm's cost of capital, leading them to reduce investment. Six years post treatment, firms exhibit reductions of 7.1% in physical capital and 8.4% in intangible capital. Supporting evidence shows that benchmarking similarly elevates the perceived cost of equity among equity analysts and regulators. We find consistent results at the industry level. Industries experiencing greater increases in CAPM βs due to benchmarking accumulated less capital over the past two decades. Furthermore, benchmarking creates excess dispersion in CAPM βs within industries, leading to inefficient capital allocation across firms. Increases in CAPM βs largely offset the decline in the risk-free rate over the last two decades. This mechanism can explain 57% of the “missing investment” puzzle.

@techreport{kontzhanson2024,
   title={The Real Cost of Benchmarking},
   author={Kontz, Christian and Hanson, Sebastian},
   type={Working Paper},
   institution={Stanford University},
   year={2024},
}

Selected Presentations: SFS Cavalcade NA 2025*, FIRS 2025*, Four Corners Center*, Northeastern University Finance Conference 2025*, UIC Finance Conference 2025^*,c, Citadel^c
( * scheduled, ^c co-author)

The ESG convenience yield in auto loan securitizations rose from 0.03% in 2017 to 0.54% in 2022. Consumers financing vehicles through captive lenders benefit from lower borrowing costs. However, the focus on ESG scores also lowers the cost of capital for high-emissions vehicles. ESG funds allocate more capital to securitizations from issuers with high ESG scores even when they finance high-emissions vehicles. A model of subjective beliefs in which investors heuristically infer CO2 emissions from ESG scores can explain the observed effects. These findings suggest that ESG investing affects real quantities but does not raise the cost of emitting CO2.

@techreport{kontz2023esg,
   title={Do ESG Investors Care About Carbon Emissions? Evidence From Securitized Auto Loans},
   author={Kontz, Christian},
   type={Working Paper},
   institution={Stanford University},
   year={2023},
}

Selected Presentations: FIRS Conference 2024, OU-RFS Climate and Energy Conference 2024, GRASFI Conference 2024, SoFiE Conference 2024, CEPR-ESSEC-Luxembourg Conference on Sustainable Financial Intermediation, Harvard Climate Economics Workshop, UC Santa Cruz

Awards: FIRS Conference 2024 Prize for PhD Students, GRASFI Conference 2024 Best PhD Paper Award, Myron S. Scholes PhD Prize 2024

This paper studies the impact of environmental, social, and governance (ESG) investing on the real economy. Using within industry-year variation, I find that 1.) firms with high ESG ratings have low marginal revenue products of capital (MRPK), while, 2.) firms with high sales per tCO2 emission have high MRPKs. This implies that reallocating capital to firms with high ESG ratings lowers allocative efficiency while reallocating capital to greener firms increases it. Motivated by these facts, I estimate a dynamic investment model featuring convenience yields on ESG assets and a CO2 externality to explore the implications of ESG investing for capital misallocation and climate change mitigation.