NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Benchmark Inclusion Subsidy

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

NBER Working Paper No. 25337
Issued in December 2018, Revised in January 2020
NBER Program(s):Asset Pricing, Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w25337

 
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