Passive Funds, Ownership Dynamics, and Corporate Governance

40 Pages Posted: 27 Apr 2023 Last revised: 7 Apr 2024

See all articles by Kevin D. Chen

Kevin D. Chen

Duke University - Fuqua School of Business

John C. Heater

University of Minnesota - Twin Cities - Department of Accounting

Date Written: April 04, 2024

Abstract

The growth of passive index funds has fueled an ongoing debate about the governance impact of passive funds. Motivated by the theoretical framework in Corum, Malenko, and Malenko (2023), we provide empirical evidence that passive fund growth is more likely to harm governance when it crowds out active funds but is more likely to improve governance when it replaces non-fund investments. Further, we show that there are limits to the benefits of passive fund growth, as beyond a certain level it tends to crowd out investors’ allocations to active funds. Our findings highlight how ownership dynamics matter for the governance effects of passive ownership and help reconcile conflicting evidence on this issue from prior studies.

Keywords: Passive Funds; Active Funds; Institutional Ownership; Corporate Governance; Corporate Transparency

JEL Classification: D22; G23; G30; G34; M41

Suggested Citation

Chen, Kevin and Heater, John C., Passive Funds, Ownership Dynamics, and Corporate Governance (April 04, 2024). Available at SSRN: https://ssrn.com/abstract=4419769 or http://dx.doi.org/10.2139/ssrn.4419769

Kevin Chen (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

John C. Heater

University of Minnesota - Twin Cities - Department of Accounting ( email )

271 19th Avenue South
Room 645 Mgt. Econ. Building
Minneapolis, MN 55455
United States

HOME PAGE: http://johnheater.com

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