Marco Sammon is an assistant professor in the Finance Unit at Harvard Business School. He and his co-authors have researched on how indexing interacts with IPOs, particularly relating to fast-track additions to equity indices in the US, and the behaviour of firms in response to equity index rebalancing.
With Marco, we try to draw some conclusions for investors and management teams about how to adapt to the growing share of passive ownership in equity markets – which can be both frustrating at times, and beneficial to companies going public.
🎧Listen on: Spotify | Apple Podcasts 🎧
If you have feedback, or there are any topics you would like us to cover on the show, please reach out at contact@ipostories.com
Disclaimer: The discussion in this episode is not financial advice, nor an investment recommendation, nor a solicitation to buy or sell any financial instruments or an offer for financial services or any other transaction. The information contained in the recording has no contractual value and is intended for informational purposes only. Amundsen Investment Management and the participants in this podcast may have holdings in the companies being discussed. Any views expressed are those of the guests only, and not of Amundsen Investment Management.
[0:06] Per Einar Ellefsen: Today we are hosting Marco Sammon, professor at Harvard Business School, to talk about the intersection of passive investment and IPOs.
[0:47] Per Einar Ellefsen: As some of you know, I had the privilege of managing the Equity Enhanced Indexing department at Norges Bank Investment Management, the Norwegian sovereign wealth fund, for three years before founding Amundsen.
I’m very convinced that indexing will continue to grow as a force in the equity market — and both management teams and asset owners need to pay attention to how this affects them.
[1:04] Per Einar Ellefsen: Marco and his co-authors have done some very interesting research on how indexing interacts with IPOs, particularly relating to fast-track additions to equity indices in the U.S. and the behavior of firms in response to index rebalancing.
With Marco, we’ll try to draw some conclusions for investors and management teams about how to adapt to the growing share of passive ownership — which can be both frustrating at times and beneficial.
[1:25] Per Einar Ellefsen: If you’re interested in this topic, we also hosted Mark Makepeace, CEO of Wilshire Indices and former CEO of FTSE Russell, last year in Episode 18.
[1:51] Per Einar Ellefsen: So I’m here today with Marco Sammon, professor at Harvard Business School, who has written some very interesting papers about indexing and equity capital markets.
Before we dive deeper into your research, Marco, could you tell us a bit about what initially drew you to studying the effects of indexing on the equity market?
[2:18] Marco Sammon: I actually have to give credit to my mom. At the end of my second year in graduate school, I was trying to figure out a topic to work on, and I came across an op-ed by Seth Klarman, the famous value investor. He wrote that he couldn’t make money anymore because of passive ownership — that it had distorted valuations in the stock market.
I’d read his book Margin of Safety as an undergrad — it’s legendary — so I thought, could he be wrong? If you’re just buying things on a value-weighted basis, how can that distort valuations? That question hooked me, and I’ve now spent nearly 10 years studying it.
[3:02] Per Einar Ellefsen: How does Seth Klarman connect with indexing? He’s not really an indexer, right?
[3:08] Marco Sammon: Right. His hedge fund wasn’t performing well, and he wrote that passive flows were distorting relative value trades. He said, “Passive pushes everything in one direction, so my relative value trades don’t work anymore.”
And he’s not alone — David Einhorn and others have said similar things. So I wanted to take these predictions seriously and test them scientifically in the cross-section of U.S. equities.
[3:57] Per Einar Ellefsen: You’re right — a lot of active managers complain about flows and about indexing. But beyond opinions, let’s talk about how much passive investing has really grown. Can you paint us a picture of its evolution?
[4:19] Marco Sammon: Sure. But first, an important background point — there’s a famous 1991 essay by Bill Sharpe, The Arithmetic of Active Management. The core idea is simple: collectively, active managers must have an alpha of zero on average. The market’s alpha with respect to itself is zero, so if passive just tracks the market, active as a group can’t outperform.
That logic holds whether passive is 5% or 50% — but passive today is not always the market.
[5:11] Marco Sammon: Passive investing has risen massively through index funds and ETFs — think VTI, Vanguard’s Total Market fund, almost $2 trillion across all share classes. Then you have S&P 500, Russell 1000/2000, and others.
But also narrower ETFs — thematic, sector, or factor-based funds — like “COWZ,” which holds the 100 most profitable stocks in the Russell 1000 weighted by cash-flow yield. Those aren’t the market portfolio, which means the aggregate “passive” portfolio now differs from the true market portfolio.
[6:33] Marco Sammon: Beyond funds, there’s direct indexing (people replicating indices individually) and shadow indexing (active funds that partially track their benchmark). When you add those up, passive ownership in the U.S. market is close to 50%.
[7:08] Per Einar Ellefsen: Fifty percent — meaning about half of U.S. equities are owned by indexers?
[7:08] Marco Sammon: Yes. Using event-based calculations from index additions and deletions, we estimate that 40–50% of total market cap is held by passive vehicles. And despite all the fears that “the world will end” at 50% passive, we’ve crossed that line — and markets still function.
[7:48] Per Einar Ellefsen: It’s remarkable. So how has this changed market dynamics?
[9:57] Marco Sammon: The classic worry goes back to Grossman and Stiglitz (1980) — if too many uninformed investors (like passive funds) enter, prices become less informative.
But evidence is mixed. Some studies say passive reduces price informativeness; others say it increases it. Measuring “informativeness” is hard.
In my own work, I study earnings announcements, where we know large amounts of information hit the market. I find that higher passive ownership slightly reduces pre-announcement price informativeness — but the effect is small.
[11:11] Marco Sammon: So the story is nuanced. Maybe some people stop learning, but others step in to exploit inefficiencies. It also matters who the passive dollars replaced — uninformed retail traders, or weak active managers? If the latter, markets may even have improved.
[12:29] Per Einar Ellefsen: That’s fascinating. But in IPOs, this structural change must matter a lot — fewer active managers, larger institutions, and more passive flows.
Can we talk about how indices actually treat IPOs? How do inclusion rules differ across providers?
[14:19] Marco Sammon: Sure. There are three main families: S&P, Russell, and CRSP.
- S&P requires one full year of GAAP earnings before a company can be added to the S&P 500, 400, or 600. It’s at the discretion of a committee.
- Russell is faster — quarterly reviews.
- CRSP (used by Vanguard) is fastest: since 2017, any IPO above the small-cap threshold (~$2 billion market cap) gets added on T+4 — four trading days after the IPO.
That’s extremely fast compared to the 6–12 months required by MSCI or FTSE.
[16:56] Per Einar Ellefsen: That’s a massive difference. How does fast-track inclusion affect prices?
[17:00] Marco Sammon: In our research, we find that CRSP fast-tracked IPOs rise about 5 percentage points between T+0 and T+4 relative to non-fast-tracked peers. The price effect peaks exactly when index funds buy.
If you predict inclusion just from the prospectus, that expected gain rises to about 14–15%. It’s huge, but consistent with mechanics — predictable demand meeting limited float.
[19:46] Per Einar Ellefsen: So companies might even adjust their IPO pricing knowing this, right?
[19:55] Marco Sammon: Exactly. We see that IPOs likely to be fast-tracked are priced higher and upsized more often — roughly by 7%, the same proportion that CRSP indexers will buy days later. So underwriters anticipate that demand.
[20:59] Per Einar Ellefsen: For management teams listening — what are the key thresholds for CRSP inclusion?
[21:16] Marco Sammon: You must:
- Float at least 10% of shares;
- Be a U.S. company;
- Have market cap above ~$2 billion;
- And not be a SPAC or ADR.
Size is the main determinant.
[22:10] Marco Sammon: Some worry firms might stretch valuations or increase float slightly to cross that line, but we haven’t seen strong evidence of that yet. It may come as awareness grows.
[23:33] Per Einar Ellefsen: In another paper, you study who’s actually trading against index funds during rebalancing. What did you find?
[23:52] Marco Sammon: Surprisingly, the main counterparty isn’t hedge funds — it’s the firms themselves. When index funds buy, firms tend to issue equity; when index funds sell, firms buy back shares.
Partly mechanical (indexers maintaining constant weights), partly behavioral — for example, employee stock options becoming in the money when passive demand pushes prices up.
[26:22] Per Einar Ellefsen: So employees and companies use those windows to sell or issue shares — and once a firm is in an index, it’s easier to raise equity.
[26:39] Marco Sammon: Exactly. Tesla, Meta, and others did offerings right before index inclusion. That supply absorbs some of the demand pressure and can dampen price spikes.
[27:09] Per Einar Ellefsen: Does being in an index change a firm’s investment behavior? Lower cost of capital, easier funding?
[27:35] Marco Sammon: That’s the million-dollar question. If firms are financially constrained, easier equity issuance via index inclusion could enable value-creating investment. But if governance is weak, they could waste it — “free cash flow problems,” as Michael Jensen famously described.
We need more research to tell which effect dominates.
[29:28] Marco Sammon: In another paper, I show that index funds could improve returns by delaying rebalancing — say, waiting a year after issuance. That avoids buying overvalued equity or selling into buybacks. Potential gains are 20–80 basis points annually.
[31:17] Marco Sammon: More broadly, remember: the public equity market isn’t “the market.” It’s the subset private owners choose to float. Passive investors are at the mercy of those active decisions — IPOs, buyouts, buybacks.
[32:12] Per Einar Ellefsen: Exactly — it’s an open system. Active managers need to think about their alpha sources relative to that.
At Norges, we often viewed indexing as the starting point but ran “enhanced indexing” to offset those mechanical inefficiencies — like avoiding selling into buybacks.
[33:58] Per Einar Ellefsen: The other consequence is that takeovers have become easier. Passive investors don’t block deals, so private equity can buy listed firms more easily. Asset owners need to be aware of this “silent tendering.”
[34:41] Per Einar Ellefsen: Looking forward — will passive continue to grow?
[34:46] Marco Sammon: I think so. Competition among giants like Vanguard is pushing fees near zero. That will consolidate the industry even further.
At the same time, passive investing has probably increased overall market participation, bringing in new retail savers through 401(k)s and automatic ETF flows.
So yes — structurally and behaviorally, passive still has room to grow.
[36:19] Marco Sammon: But we might also see hybrid products — ETFs with exposure to private companies or alternatives — as the next frontier.
[36:51] Per Einar Ellefsen: I agree. Passive is here to stay. Active management still adds value outside the U.S., but it’s hard to beat passive’s cost advantage.
My concern is that as markets become more passive, it could become harder to IPO — fewer active buyers, less price discovery.
[38:21] Marco Sammon: Exactly — and that’s why newly public companies need a strategy to engage with passive investors. Even though Vanguard and BlackRock are passive, they vote — and boards must engage with them on governance and policy.
[39:10] Per Einar Ellefsen: Yes, governance alignment is key. Many large funds have clear voting policies — for example, opposing combined CEO-chair roles. Boards must proactively manage those relationships.
[40:03] Per Einar Ellefsen: For companies, understanding index inclusion timelines also matters. Passive ownership is stable and long term — but deletion risk is real if liquidity or float drop.
[41:03] Marco Sammon: One idea — what if index funds could participate directly in IPO allocations? Instead of waiting until T+4 and paying a 40% premium, they could buy at IPO price.
It would improve liquidity, reduce flipping, and make inclusion seamless.
[41:46] Per Einar Ellefsen: Agreed — there’s a lot of potential for improvement in how passive and IPO markets interact.
Marco, thank you very much — fascinating research. We look forward to seeing your next findings.
[42:03] Marco Sammon: Thank you so much for having me.
[42:06] Per Einar Ellefsen: Thank you for listening to IPO Stories.
In future episodes, we’ll host CEOs, CFOs, advisors, and other participants in the IPO process to learn from their experience — like from Marco Sammon today.
If you enjoyed the show, please follow us on Spotify or Apple Podcasts, and share it with others.
If you have questions about the IPO process that you’d like us to address with future guests, please contact us at contact@ipostories.com and follow Amundsen Investment Management on LinkedIn.
Recent Comments