Which Investors Matter for Equity Valuations and Expected Returns?

This article develops a quantitative framework based on an asset demand system to assess how market trends and regulatory changes affect asset prices, price informativeness (the information content of asset prices), and the wealth distribution among investors. Applying this framework, the study finds that the transition from active to passive investment management significantly impacts equity prices but has little effect on price informativeness, as capital did not systematically flow from more to less informed investors. Additionally, climate-induced shifts in asset demand, modeled as changes in preferences toward greener stocks, can substantially influence equity prices and redistribute wealth across institutional investors, benefiting passive investment advisors, pension funds, insurance companies, and private banking, while disadvantaging active investment advisors and hedge funds. The framework also quantifies the relative influence of different institutional investor types on equity pricing, highlighting that hedge funds and small-active investment advisors have outsized effects per dollar of wealth due to their more elastic demand and distinct portfolio strategies.