Benchmarking, Product Markets, and Real Effects

There has been a considerable increase in the assets under management by institutional investors that follow a benchmark. This paper investigates whether and how benchmarking can influence firms' product market outcomes and provide a competitive advantage to large firms. I compile an investor-firm-product-household match micro-level dataset. Exploiting quasi-experimental variation in the investor composition, I show that after an increase in benchmark-constrained investors, firms (i) reduce product prices, especially for products with lower market share, (ii) generate higher sales, but at the cost of lower profitability, and (iii) introduce new products and diversify. The reduction in prices expands the product affordability of low-income households. In addition, I provide evidence that benchmark-constrained investors influence product markets by reducing firms' equity issuance costs. Using a model with product-level habits, I show that firms lower their product prices and forgo current profits in favor of higher market share in response to the reduction in the equity issuance cost. Results suggest that benchmarking can expand product choices for low-income households but potentially at the threat of higher market concentration.