Passive investing and the rise of mega-firms

Jiang, Hao, Vayanos, Dimitri ORCID: 0000-0002-0944-4914 and Zheng, Lu (2025) Passive investing and the rise of mega-firms. Review of Financial Studies. ISSN 0893-9454 (In Press)

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Abstract

We study how passive investing affects asset prices. Flows into passive funds disproportionately raise the stock prices of the economy’s largest firms, and especially those large firms in high demand by noise traders. Because of this effect, the aggregate market can rise even when flows are entirely due to investors switching from active to passive funds. Intuitively, passive flows increase the idiosyncratic risk of large firms in high demand, which discourages investors from correcting the flows’ effects on prices. Consistent with our theory, prices and idiosyncratic volatilities of the largest S&P500 firms rise the most following flows into that index.

Item Type:	Article
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
Date Deposited:	30 Jun 2025 14:57
Last Modified:	30 Jun 2025 14:57
URI:	http://eprints.lse.ac.uk/id/eprint/128591

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