Corporate Governance in the Presence of Active and Passive Delegated Investment
63 Pages Posted: 12 Sep 2020 Last revised: 4 Feb 2022
Date Written: August 2020
We examine the governance role of delegated portfolio managers. In our model, investors allocate their wealth between passive funds, active funds, and private savings, and fund fees are endogenously determined. Funds' ownership stakes and fees determine funds' 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 fees, whereas in the latter case it can harm governance. Overall, passive fund growth improves governance only if it does not increase fund investors' returns too much.
Keywords: Competition, corporate governance, delegated asset management, engagement, Index funds, investment stewardship, passive funds
JEL Classification: G11, G23, G34, K22
Suggested Citation: Suggested Citation