Hidden Power of the Big Three? Passive Index Funds, Re-Concentration of Corporate Ownership, and New Financial Risk

Business and Politics, April 2017, DOI: 10.1017/bap.2017.6

28 Pages Posted: 23 Jun 2016 Last revised: 15 May 2017

Jan Fichtner

University of Amsterdam / CORPNET

Eelke M. Heemskerk

University of Amsterdam / CORPNET

Javier Garcia-Bernardo

University of Amsterdam - Amsterdam Institute for Social Science Research (AISSR)

Date Written: February 7, 2017

Abstract

Since 2008, a massive shift has occurred from active towards passive investment strategies. The passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the ‘Big Three’. We comprehensively map the ownership of the Big Three in the United States and find that together they constitute the largest shareholder in 88 percent of the S&P500 firms. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions. This has led to opposing views on incentives and possibilities to actively exert shareholder power. Some argue passive investors have little shareholder power because they cannot ‘exit’, while others point out this gives them stronger incentives to actively influence corporations. Through an analysis of proxy vote records we find that the Big Three do utilize coordinated voting strategies and hence follow a centralized corporate governance strategy. However, they generally vote with management, except at director (re-)elections. Moreover, the Big Three may exert ‘hidden power’ through two channels: First, via private engagements with the management of invested companies; and second, because company executives could be prone to internalizing the objectives of the Big Three. We discuss how this development entails new forms of financial risk.

Keywords: Corporate Control, Corporate Ownership, Ownership Concentration, Passive Index Funds, Passive Investment, Asset Managers

JEL Classification: F02, G23, G32, G34, L22, P16

Suggested Citation

Fichtner, Jan and Heemskerk, Eelke M. and Garcia-Bernardo, Javier, Hidden Power of the Big Three? Passive Index Funds, Re-Concentration of Corporate Ownership, and New Financial Risk (February 7, 2017). Business and Politics, April 2017, DOI: 10.1017/bap.2017.6. Available at SSRN: https://ssrn.com/abstract=2798653 or http://dx.doi.org/10.2139/ssrn.2798653

Jan Fichtner (Contact Author)

University of Amsterdam / CORPNET ( email )

Nieuwe Achtergracht 166
Amsterdam, 1018 WV
Netherlands

HOME PAGE: http://www.jfichtner.net

Eelke M. Heemskerk

University of Amsterdam / CORPNET ( email )

PO BOX 15578
Amsterdam, 1001NB
Netherlands
+31 (0)20 525 2628 (Phone)

HOME PAGE: http://www.eelkeheemskerk.nl

Javier Garcia-Bernardo

University of Amsterdam - Amsterdam Institute for Social Science Research (AISSR) ( email )

Amsterdam Roeterseilandcampus
Nieuwe Achtergracht 166
Amsterdam, 1018 WV
Netherlands

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