Corporate Governance in the Presence of Active and Passive Delegated Investment
62 Pages Posted: 31 Aug 2020 Last revised: 2 Mar 2021
Date Written: February 18, 2021
We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and fund fees are endogenously determined. Funds' ownership stakes and fees determine their incentives to engage in governance. Whether passive fund growth improves governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even though it is accompanied by lower fund fees, whereas in the latter case it can be detrimental to governance. Overall, passive fund growth improves governance only if it does not increase fund investors' returns too much. Regulations that decrease funds' costs of engagement can be opposed by both fund investors and fund managers even though they are value-increasing.
Keywords: corporate governance, delegated asset management, passive funds, index funds, competition, investment stewardship, engagement
JEL Classification: G11, G23, G34, K22
Suggested Citation: Suggested Citation