imprint:
Cambridge, Mass: National Bureau of Economic Research, 2018
Published in:NBER working paper series ; no. w25337
Extent:
1 Online-Ressource; illustrations (black and white)
Language:
English
DOI:
10.3386/w25337
Identifier:
Reproduction note:
Hardcopy version available to institutional subscribers
Origination:
Footnote:
System requirements: Adobe [Acrobat] Reader required for PDF files
Mode of access: World Wide Web
Description:
We argue that a common 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 standard corporate finance result 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