Passive Investing Power: How Index Changes Alter Firm Financing Choices

A major MSCI index reform in 2000–2002 triggered mechanical shifts in investor demand, leading firms that received benchmark-driven inflows to raise significantly more equity and especially debt. The study shows that these demand shocks not only lifted stock prices but also boosted real investment, particularly through acquisitions, highlighting how passive investing shapes corporate behavior.

At the turn of the millennium, global index provider MSCI made what looked like a technical change to how it calculated its flagship equity indexes. But new research shows that this quiet shift had powerful consequences for companies around the world.

In a February 2026 study, Fernando Broner of the Centre de Recerca en Economia Internacional (CREI), Universitat Pompeu Fabra, and the Barcelona School of Economics, Juan J. Cortina and Sergio L. Schmukler of the World Bank’s Development Research Group, and Tomas Williams of George Washington University examine how changes in investor demand driven by benchmark rules can reshape corporate decisions.

Their work comes at a time when institutional investors dominate global finance. By 2020, assets under management worldwide had reached 132 percent of global GDP. A large share of this money is invested through funds that closely track market indexes. These funds must buy and sell stocks to match benchmark weights, often with little discretion. That makes demand for certain shares mechanical and relatively insensitive to price.

A Rare Natural Experiment

Between 2000 and 2002, MSCI changed how it weighted companies in its global equity indexes. Instead of using total market capitalization, it shifted to free-float market capitalization, which counts only shares available for public trading. It also expanded the share of each market included in the index.

This reform affected 2,508 firms across 49 countries. Some companies saw their index weights rise, which meant funds tracking the index had to buy more of their shares. Others saw their weights fall, leading to predictable selling.

Because the changes were rule-based and not related to company performance, they created a rare natural experiment. The researchers built a firm-level measure estimating how much money would flow in or out of each company as a result of the reweighting. They then linked this measure to detailed data on equity and debt issuance, stock prices, and company financials for more than 1,100 non-financial firms that stayed in the index throughout the reform.

More Demand, More Financing

The results show a clear pattern. Before the reform, companies that would later receive positive or negative flows behaved similarly. After the announcement, their paths split.

Firms that experienced predicted inflows significantly increased their capital raising compared with firms facing outflows. A one-percentage-point increase in benchmark-driven inflows led to nearly a two-percentage-point increase in total capital raised relative to company size.

Both equity and debt issuance increased. But the jump was much stronger in debt markets. For each percentage point of inflow, debt issuance rose by about 1.2 percentage points, while equity issuance increased by roughly 0.45 percentage points.

To understand why, the researchers also examined stock prices. They found that benchmark-induced demand pushed share prices up. A 1 percent rise in stock prices led to a 0.25 percentage-point increase in total capital raised, with most of the response coming through debt.

Higher stock prices improve a firm’s balance sheet. When market value rises, companies can borrow more without appearing riskier. In simple terms, stronger equity valuations loosen borrowing constraints. Companies took advantage of that room to expand their financing, especially through debt.

From Financial Markets to Real Investment

The story does not end with financial engineering. The researchers also looked at what companies did with the extra funds.

Firms benefiting from benchmark-driven inflows increased their overall investment. This includes capital expenditures such as equipment and buildings, mergers and acquisitions, and research and development. A one-percentage-point increase in predicted inflows was linked to a meaningful rise in total investment relative to company size.

Capital expenditures made up the largest share of the overall increase. But when the researchers tracked how newly raised funds were used, mergers and acquisitions stood out. In the year companies issued securities, roughly 60 cents of every dollar raised went to acquisitions. That share grew over the next two years. Research spending also increased, while some funds were temporarily held as cash before being deployed.

Importantly, company profits did not show similar changes. This suggests the investment boost was driven by easier access to external financing, not by improved business performance.

Why It Matters in the Age of Passive Investing

To explain the findings, the authors developed a simple economic model. In it, companies finance investment using a mix of equity and debt, but borrowing is limited by the value of equity. When investor demand raises share prices and lowers the cost of capital, those borrowing limits relax. Investment rises, and debt issuance increases more strongly than equity issuance.

The broader message is clear. As institutional asset management continues to expand, benchmark rules and index construction matter more than ever. Mechanical shifts in index weights can change not only stock prices, but also how companies raise money and invest in the real economy.

What looked like a technical update to index methodology turned out to be a powerful force shaping corporate behavior. In today’s world of passive investing, demand does more than move markets. It helps steer companies themselves.