NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Jian Li

Department of Economics
University of Chicago
5757 S. University Avenue
Chicago, IL 60637

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Chicago

NBER Working Papers and Publications

December 2018The Benchmark Inclusion Subsidy
with Anil K. Kashyap, Natalia Kovrijnykh, Anna Pavlova: w25337
We study the impact of evaluating the performance of asset managers relative to a benchmark portfolio on firms’ investment, merger and IPO decisions. We introduce asset managers into an otherwise standard asset pricing model and show that firms that are part of the benchmark are effectively subsidized by the asset managers. This “benchmark inclusion subsidy” arises because asset managers have incentives to hold some of the equity of firms in the benchmark regardless of the risk characteristics of these firms. Contrary to what is usually taught in corporate finance, we show that the value of an investment project is not governed solely by its own cash-flow risk. Instead, because of the benchmark inclusion subsidy, a firm inside the benchmark would accept some projects that an identical one ...
 
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