Working Paper: NBER ID: w25914
Authors: Lucian A. Bebchuk; Scott Hirst
Abstract: This paper examines the large, steady, and continuing growth of the Big Three index fund managers—BlackRock, Vanguard, and State Street Global Advisors. We show that there is a real prospect that index funds will continue to grow, and that voting in most significant public companies will come to be dominated by the future “Giant Three.”\nWe begin by analyzing the drivers of the rise of the Big Three, including the structural factors that are leading to the heavy concentration of the index funds sector. We then provide empirical evidence about the past growth and current status of the Big Three, and their likely growth into the Giant Three. Among other things, we document that the Big Three have almost quadrupled their collective ownership stake in S&P 500 companies over the past two decades; that they have captured the overwhelming majority of the inflows into the asset management industry over the past decade; that each of them now manages 5% or more of the shares in a vast number of public companies; and that they collectively cast an average of about 25% of the votes at S&P 500 companies.\nWe then extrapolate from past trends to estimate the future growth of the Big Three. We estimate that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades. Policymakers and others must recognize—and must take seriously—the prospect of a Giant Three scenario. The plausibility of this scenario makes it important to understand the incentives of index fund managers, a topic that we study in other work.
Keywords: Index Funds; Institutional Investors; Corporate Governance
JEL Codes: G23; G34; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory changes (G18) | growth of institutional investor ownership (G23) |
| market dynamics (D49) | growth of institutional investor ownership (G23) |
| growth of institutional investor ownership (G23) | significant voting power of the big three (D72) |
| average combined stake of the big three in S&P 500 companies (G34) | significant influence over corporate governance (G38) |
| current trends (F44) | future control of 40% of votes by the big three (D72) |