77 Pages Posted: 3 Aug 2014 Last revised: 15 Mar 2016
Date Written: February 6, 2016
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.
Keywords: corporate governance, institutional ownership, passive funds, performance
JEL Classification: D22, G23, G30, G34, G35
Suggested Citation: Suggested Citation
Appel, Ian and Gormley, Todd A. and Keim, Donald B., Passive Investors, Not Passive Owners (February 6, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2475150 or http://dx.doi.org/10.2139/ssrn.2475150