Passive Funds, Ownership Dynamics, and Corporate Governance

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