We derive equilibrium asset prices when fund managers deviate from benchmark indices to exploit noise-trader induced … distortions but fund investors constrain these deviations. Because constraints force managers to buy assets that they underweight …. Noise traders bias prices upward because constraints make it harder for managers to underweight overvalued assets, which …

beyond traditional capital-structure determinants. First, managers who believe that their firm is undervalued view external … financing as overpriced, especially equity. Such overconfident managers use less external finance and, conditional on accessing …