Corporate Governance in the Presence of Active and Passive Delegated Investment

62 Pages Posted: 31 Aug 2020 Last revised: 2 Mar 2021

See all articles by Adrian Aycan Corum

Adrian Aycan Corum

Cornell University - Samuel Curtis Johnson Graduate School of Management

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR)

Nadya Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: February 18, 2021

Abstract

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

Corum, Adrian Aycan and Malenko, Andrey and Malenko, Nadya, Corporate Governance in the Presence of Active and Passive Delegated Investment (February 18, 2021). European Corporate Governance Institute – Finance Working Paper 695/2020, Available at SSRN: https://ssrn.com/abstract=3681095 or http://dx.doi.org/10.2139/ssrn.3681095

Adrian Aycan Corum

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

437 Sage Hall
114 East Ave.
Ithaca, NY 14853
United States

HOME PAGE: http://https://www.johnson.cornell.edu/faculty-and-research/faculty/aac256

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nadya Malenko (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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