Passive Investors, Not Passive Owners

Citation data:

SSRN Electronic Journal

Publication Year:
2016
Usage 22049
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SSRN
SSRN Id:
2475150
DOI:
10.2139/ssrn.2475150
Author(s):
Ian Appel; Todd A. Gormley; Donald B. Keim
Publisher(s):
Elsevier BV
Tags:
corporate governance; institutional ownership; passive funds; performance
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article description
Passive institutional investors are an increasingly important component of U.S. stock ownership. To examine whether and by which mechanisms passive investors influence firms’ governance, we exploit variation in ownership by passive mutual funds associated with stock assignments to the Russell 1000 and 2000 indexes. Our findings suggest that passive mutual funds influence firms’ governance choices, resulting in more independent directors, removal of takeover defenses, and more equal voting rights. Passive investors appear to exert influence through their large voting blocs, and consistent with the observed governance differences increasing firm value, passive ownership is associated with improvements in firms’ longer-term performance.