Commodity Market Financialization and Information Dissemination in Capital Markets

Abstract

Since 2004, passive index investing has grown dramatically. The share of capital allocated to passive index funds has risen from 3% of total assets under management in 2003 to more than 50% by the end of 2023, exceeding US$13.29 trillion in assets (Cox 2024). This surge in index investment, commonly referred to as the financialization of commodity markets (FCM), constitutes an exogenous shock that reduces the informativeness of commodity futures prices (e.g., Stoll and Whaley 2010; Cheng, Kirilenko, and Xiong 2015; Henderson, Pearson, and Wang 2015; Sockin and Xiong 2015; Brogaard, Ringgenberg, and Sovich 2019). In my thesis, I explore whether and how distorted signals from commodity markets are transmitted to capital markets. Specifically, I examine how FCM influences key information intermediaries in capital markets, including commercial banks and financial analysts.

In the first chapter, I examine the effect of FCM on bank loan contracting. I find that in the post-FCM period, when the futures prices become less informative, banks impose higher loan spreads on firms that are more reliant on index commodities. This implies that banks incorporate the information embedded in commodity futures prices when assessing borrowers’ creditworthiness. Consistent with an information-based mechanism, I find that this impact is larger when banks exhibit lower information sophistication, firms provide lower-quality financial reporting, and firms operate in more opaque environments. This finding is not driven by the exposure to general commodity risk or deterioration in firm performance. Additional evidence reveals that banks also tighten non-price loan terms, and the rise in borrowing costs constrains investment, particularly among bank-dependent firms. Overall, these results underscore the informational role that commodity futures markets play in shaping bank loan contracting and highlights the broader economic implications of financialization.

In the second chapter, I examine how FCM affects analysts’ ability to perform their information intermediary role. I find that, following FCM, analyst forecast accuracy declines and forecast disagreement widens. Such effects are more pronounced for opaque firms and among narrowly specialized analysts. Investors appear to recognize this deterioration: market reactions to forecast revisions weaken and affected analysts’ chance of being elected as “star analysts” deteriorates. Analysts adjust by issuing forecasts with longer delays, revising more frequently, producing less detailed estimates, and broadening their coverage to include supply chain-related firms. Overall, these results suggest that passive investing weakens the transmission of fundamental information from financial analysts to the market, heightens information asymmetry, and undermines analysts’ traditional role as monitors.

Prior studies have shown that index trading-induced noise in commodity futures markets disrupts commodity production and demand (Sockin and Xiong 2015; Goldstein and Yang 2022) and disturbs firms’ internal decision-making (Brogaard et al. 2019; Ferracuti 2022). This thesis extends that literature by demonstrating that the distortions associated with financialization also affect banks and analysts, two essential yet underexplored market participants. FCM leads banks to tighten loan terms for firms dependent on index commodities, with important implications for corporate investment and long-term growth. It also reduces the quality and stability of analyst forecasts, weakening their effectiveness as information intermediaries in the capital markets. These findings have important implications for policymakers seeking to preserve the benefits of passive investing while maintaining market transparency, information dissemination, and overall financial stability.

Date of Award	6 May 2026
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Haibin WU (Supervisor) & Yangxin YU (Co-supervisor)