Growth of Passive Investments and Asset Prices, with Ilan Gildin (Job Market Paper)

Abstract: This paper examines the impact of the rise of index-tracking investments on stock prices. In Israel, a regulatory shock reduced the cost of passive investment in index-tracking securities and induced massive capital allocation to the index market. Indices comprising stocks with smaller market capitalization were disproportionately affected by these changes. We use the growth of passive ownership across market index cutoffs to identify the price effects of inflows to index-tracking securities. We find a significant effect. We then show that algorithmic traders, in aggregate, accumulate stocks when index inflows are low, and sell stocks when they are high. Our results suggest that algorithmic traders earn excessive returns by providing liquidity to the originators of index-tracking securities. Our findings provide new evidence for the effect that the rise of passive investments has on the financial markets, and offer insight into the trading activity against inflows to index-tracking securities.

Corporate Payouts: dividends and repurchases

Abstract: This work presents a dynamic model of corporate payout policy that combines a policy of ongoing dividend payments and special payments. The model provides a formal framework to analyze how firms use different payout structures to achieve the desired payout policy. The model emphasizes the value of dividends as a liable payout strategy that allows the firm to mitigate cash carrying costs. However, dividends also prevent the firm from adjusting its payout plan when the opportunity cost of flexibility is high. This trade-off is a vital driving force of the optimal payout structure, and it helps to explain diverse payout dynamics. Cash-flow volatility plays a significant role in the decision about the optimal payout form and on payout smoothing.