The Silent Weapon in the Rise of Passive: Shaping the Corporate Landscape

60 Pages Posted: 9 Jun 2019

Date Written: April 28, 2019

Abstract

We present a new channel that rationalizes the recent rise in the share of passive investment in the asset management industry. By including the effect that firm shareholders have on corporate decisions, we establish that the preferred firm strategy of different shareholders varies conditional on their portfolio allocations. Passive investors who hold a market portfolio influence firms to pursue strategies that reduce the value of holding any other portfolio. In a rational information model, endogenous strategic complementarities arise where passive investors decrease the expected profits from information acquisition. This effect leads to passive investors giving rise to more passive investors as the equilibrium outcome. Furthermore, we offer various empirical predictions to guide future research.

Keywords: Mutual Funds, Passive Investors, Rational Expectations Equilibrium

JEL Classification: G11, G23

Suggested Citation

Cocoma, Paula and Zhang, Jinyuan, The Silent Weapon in the Rise of Passive: Shaping the Corporate Landscape (April 28, 2019). Available at SSRN: https://ssrn.com/abstract=3379325 or http://dx.doi.org/10.2139/ssrn.3379325

Paula Cocoma (Contact Author)

INSEAD - Finance ( email )

France

Jinyuan Zhang

INSEAD ( email )

INSEAD, Boulevard de Constance,
Fontainebleau, 77300
France

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