The benchmark inclusion subsidy

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

Research output: Contribution to journalArticlepeer-review

11 Scopus citations


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)
Pages (from-to)756-774
Number of pages19
JournalJournal of Financial Economics
Issue number2
StatePublished - Nov 2021


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

ASJC Scopus subject areas

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


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