Vol. 19, No. 1, 2021
This study investigates the impact of active investment management on the efﬁciency of public security markets. The scholarly literature indicates that active management contributes to market efﬁciency, thereby providing positive externalities for all investors, including investors in passively-managed funds. Contrary to popular interpretations of Sharpe’s (1991) “active arithmetic,” the beneﬁts of active management are ampliﬁed in small and mid-capitalization U.S. stocks, enhancing the ability of these companies to raise capital for investments in the real economy. Across all public corporations, the improved efﬁciency afforded by active management helps to discipline capital expenditures by corporations through a more efﬁcient stock price.