Working Paper: CEPR ID: DP15230
Authors: Adrian Aycan Corum; Andrey Malenko; Nadya Malenko
Abstract: We examine the governance implications of passive fund growth. In our model, investors allocate capital between passive funds, active funds, and private savings, and funds' fees and ownership stakes determine their incentives to engage in governance. If passive funds grow because of easier access to index investing, governance improves, albeit only up to a point where passive funds start primarily crowding out investors' allocations to active funds rather than private savings. In contrast, if passive funds grow because of reduced opportunities for profitable active management, governance worsens. Our results reconcile conflicting evidence about the effects of passive ownership on governance.
Keywords: corporate governance; delegated asset management; passive funds; index funds; competition; investment stewardship; engagement
JEL Codes: G11; G23; G34; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| easier access to index investing (G23) | improved governance (G38) |
| passive funds crowding out active fund allocations (G23) | limited improvement in governance (H11) |
| decreased opportunities for profitable active management (G11) | worse governance (H11) |
| passive fund growth (G23) | governance implications depend on source (G38) |
| fund fees and ownership stakes (G23) | fund managers' incentives to monitor (G23) |