@article{4138cad801bb4915b4462e8165550502,
title = "The benchmark inclusion subsidy",
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.",
keywords = "Asset management, Benchmark, Investment, Mergers, Project valuation",
author = "Kashyap, {Anil K.} and Natalia Kovrijnykh and Jian Li and Anna Pavlova",
note = "Funding Information: We thank the Editor (Bill Schwert) and two anonymous referees for their excellent comments. We have also benefited from comments by Jan Bena, Jules van Binsbergen, Andrea Buffa, Hui Chen, Simon Gervais, Denis Gromb, Marcin Kacperczyk, Steve Kaplan, Ralph Koijen, Felix Kubler, Shohini Kundu, Ailsa Roell, Jeremy Stein, David Thesmar, Dimitri Vayanos, Rob Vishny, Costas Xiouros, and seminar participants at ASU, Chicago Booth, LBS, NBIM, Philadelphia Fed, University of Zurich, AFA 2020 Annual Meeting, the 5th BI-SHOF conference, the 2019 Bank of England Research Forum on Macro-Finance, Cambridge Corporate Finance Theory Symposium 2019, the 2019 European Winter Finance conference, ISF 2019, the Macro Financial Modeling (MFM) Winter 2019 Meeting, Fall 2018 NBER Corporate Finance Program Meeting, the 2019 NBER Long-Term Asset Management Meeting, the 2019 Paul Woolley Centre conference, and the 2019 UBC Winter Finance conference. We thank Taisiya Sikorskaya for excellent research assistance. This research has been supported by a grant from the Alfred P. Sloan Foundation to the MFM project at the University of Chicago. The views expressed here are ours only and not necessarily those of the institutions with which we are affiliated, and all mistakes are our own. Funding Information: ☆ We thank the Editor (Bill Schwert) and two anonymous referees for their excellent comments. We have also benefited from comments by Jan Bena, Jules van Binsbergen, Andrea Buffa, Hui Chen, Simon Gervais, Denis Gromb, Marcin Kacperczyk, Steve Kaplan, Ralph Koijen, Felix Kubler, Shohini Kundu, Ailsa Roell, Jeremy Stein, David Thesmar, Dimitri Vayanos, Rob Vishny, Costas Xiouros, and seminar participants at ASU, Chicago Booth, LBS, NBIM, Philadelphia Fed, University of Zurich, AFA 2020 Annual Meeting, the 5th BI-SHOF conference, the 2019 Bank of England Research Forum on Macro-Finance, Cambridge Corporate Finance Theory Symposium 2019, the 2019 European Winter Finance conference, ISF 2019, the Macro Financial Modeling (MFM) Winter 2019 Meeting, Fall 2018 NBER Corporate Finance Program Meeting, the 2019 NBER Long-Term Asset Management Meeting, the 2019 Paul Woolley Centre conference, and the 2019 UBC Winter Finance conference. We thank Taisiya Sikorskaya for excellent research assistance. This research has been supported by a grant from the Alfred P. Sloan Foundation to the MFM project at the University of Chicago. The views expressed here are ours only and not necessarily those of the institutions with which we are affiliated, and all mistakes are our own. Publisher Copyright: {\textcopyright} 2021 Elsevier B.V.",
year = "2021",
month = nov,
doi = "10.1016/j.jfineco.2021.04.021",
language = "English (US)",
volume = "142",
pages = "756--774",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "2",
}