The benchmark inclusion subsidy

Kashyap, A K, Kovrijnykh, N, Li, Jian and Pavlova, A (2021) The benchmark inclusion subsidy. Journal of Financial Economics. ISSN 0304-405X (In Press)

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.

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Item Type: Article
Subject Areas: Finance
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© 2021 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 licence https://creativecommons.org/licenses/by-nc-nd/4.0

Date Deposited: 15 Jan 2021 10:17
Date of first compliant deposit: 13 Jan 2021
Subjects: I > Investment appraisal
M > Mergers and acquisitions
A > Assets
Last Modified: 15 Jun 2021 13:04
URI: https://lbsresearch.london.edu/id/eprint/1516
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