Date of Graduation

9-2023

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Accounting

Advisor/Mentor

Kristian Allee

Committee Member

Vernon Richardson

Second Committee Member

Caleb Rawson

Abstract

While prior research argues that individual investors benefit from a switch to passive investment in index funds (French 2008, Bond and García 2022), higher levels of index fund ownership of firm shares lead to competing factors that influence a firm’s price efficiency (i.e., the speed and accuracy with which a firm’s stock price reflects investor consensus on the information provided about a firm). If relative investor sophistication increases as index fund ownership increases, there is a benefit to the firm’s price efficiency. Yet, more shares held passively limit the shares available for investors to actively incorporate firm news, adversely impacting price efficiency. In this study, I consider these two competing factors using alternative sources of firm information during its earnings season to explore the impact of index fund ownership on a firm’s stock price efficiency. I find evidence of decreased investor disagreement associated with a firm’s earnings announcement, indicating a benefit to the firm’s price efficiency. Yet, I also find the decrease in investor participation from higher levels of index fund ownership adversely affects a firm’s price efficiency when incorporating information based on investor expectations of firm performance from peer disclosures. These contextualized results provide no conclusive evidence on the total impact of index fund ownership at currently observed levels, but should continue to be studied as passive investment increases over time.

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