Abstract

This paper investigates whether and how investor composition affects firms’ product prices, customer composition, and market share. I compile a micro-level dataset that links firms’ investors with the products firms sell and the underlying household customers of these products. Exploiting quasi-experimental variation, I show that after experiencing an increase in benchmark-constrained investors, firms (i) set lower product prices, especially for products with lower market share, (ii) expand their customer base towards lower-income households, and (iii) introduce new products and diversify. I provide evidence that benchmark constrained investors influence product markets by reducing firms’ cost of equity. Using a model with product-level habits, I show that in response to the reduction in equity issuance cost due to an increase in demand for firms’ equity, firms lower their product prices and forgo current profits in favor of higher market share. Overall, these results suggest that trends such as the growth of ETFs can expand affordable product choices for low-income households, but potentially at the cost of lower market competition.