The benchmark inclusion subsidy

Anil K. Kashyap, Natalia Kovrijnykh, Jian Li, Anna Pavlova

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
JournalJournal of Financial Economics
DOIs
StateAccepted/In press - 2021
Externally publishedYes

Keywords

  • Asset management
  • Benchmark
  • Investment
  • Mergers
  • Project valuation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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