Passive funds deviate from their benchmarks by buying new issue bonds before they are index eligible. Bonds with higher allocations to passive funds have lower underpricing and short‑term returns. Proxies for order book size and post-issuance performance indicate these deals have lower demand from other investors, consistent with passive investors serving as a backstop for deals that would otherwise not be completed at the stated terms. The price inelastic capital supply of passive funds benefits underwriters, issuers and active funds. Despite receiving underperforming new issue bonds, primary market participation is optimal for passive funds given limited secondary market liquidity.

The declining number of U.S. public companies has attracted concern from regulators, prompting changes to make the IPO process more attractive. One key initiative, the JOBS Act, was designed to reduce IPO costs by allowing eligible firms to test the waters with investors and reduce disclosure. Using a difference-in-differences setting, we show that these provisions have decreased targeted firms’ propensity to go public relative to the control samples, but improved the average quality of targeted firms that complete an IPO. This is consistent with our conceptual framework where testing the waters (rather than reduced disclosure) gives firms an opportunity to learn from investors before incurring information revelation costs from a public filing.

A new era of abundant global liquidity and the maturation of domestic capital markets has transformed corporate bond financing in emerging economies. We show that these forces enabled firms in several EMEs, especially in East Asia, to access bond markets with levels of market access comparable to advanced economies during global financial stress brought on by the COVID-19 pandemic. This sustained funding capacity, fueled by accommodative liquidity spillovers, was however accompanied by rising financial vulnerabilities, highlighting the double-edged nature of market deepening.

Misspecified benchmarks are widespread among active bond mutual funds, driven in part by the industry's heavy dependence on the Bloomberg U.S. Aggregate Index. Active funds outperform their self-declared benchmarks by 3% over a 36-month horizon. However, this outperformance is fully explained by their choice of benchmarks, which tend to have lower systematic risk than their actual portfolios. When evaluated against more appropriate benchmarks identified from return correlations, these funds underperform. Benchmark-adjusted returns strongly predict future flows, giving managers incentives to misbenchmark. Although benchmark changes are infrequent, they appear strategic: funds switch to easier-to-beat benchmarks following periods of underperformance and subsequently experience a temporary increase in flows.

We study how passive bond funds deliver benchmark returns, emphasizing the structural differences between fixed income and equity investing. While passive bond funds have high measures of "activeness" due to the use of representative sampling, their benchmark-adjusted alphas are zero and tracking errors are lower than many equity counterparts. The degree of sampling is directly related to the substitutability of underlying bonds, and tracking error is attributable to deviations on key characteristics (duration and rating) rather than deviations from constituents weights. More recently, portfolio trading has allowed passive bond funds to increase their number of holdings and further reduce tracking errors.