The Silent Weapon in the Rise of Passive: Shaping the Corporate Landscape
60 Pages Posted: 9 Jun 2019
Date Written: April 28, 2019
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: Suggested Citation