Passive investors, not passive owners

Ian R. Appel; Todd A. Gormley; Donald B. Keim

doi:10.1016/j.jfineco.2016.03.003

Passive investors, not passive owners

Ian R. Appel
, Todd A. Gormley
, Donald B. Keim

Research output: Contribution to journal › Article › peer-review

453 Scopus citations

Abstract

Passive institutional investors are an increasingly important component of U.S. stock ownership. To examine whether and by which mechanisms passive investors influence firms' governance, we exploit variation in ownership by passive mutual funds associated with stock assignments to the Russell 1000 and 2000 indexes. Our findings suggest that passive mutual funds influence firms' governance choices, resulting in more independent directors, removal of takeover defenses, and more equal voting rights. Passive investors appear to exert influence through their large voting blocs, and consistent with the observed governance differences increasing firm value, passive ownership is associated with improvements in firms' longer-term performance.

Original language	English
Pages (from-to)	111-141
Number of pages	31
Journal	Journal of Financial Economics
Volume	121
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2016.03.003
State	Published - Jul 1 2016

Keywords

Corporate governance
Institutional ownership
Passive funds
Performance

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10.1016/j.jfineco.2016.03.003

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title = "Passive investors, not passive owners",

abstract = "Passive institutional investors are an increasingly important component of U.S. stock ownership. To examine whether and by which mechanisms passive investors influence firms' governance, we exploit variation in ownership by passive mutual funds associated with stock assignments to the Russell 1000 and 2000 indexes. Our findings suggest that passive mutual funds influence firms' governance choices, resulting in more independent directors, removal of takeover defenses, and more equal voting rights. Passive investors appear to exert influence through their large voting blocs, and consistent with the observed governance differences increasing firm value, passive ownership is associated with improvements in firms' longer-term performance.",

keywords = "Corporate governance, Institutional ownership, Passive funds, Performance",

author = "Appel, \{Ian R.\} and Gormley, \{Todd A.\} and Keim, \{Donald B.\}",

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AU - Appel, Ian R.

AU - Gormley, Todd A.

AU - Keim, Donald B.

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N2 - Passive institutional investors are an increasingly important component of U.S. stock ownership. To examine whether and by which mechanisms passive investors influence firms' governance, we exploit variation in ownership by passive mutual funds associated with stock assignments to the Russell 1000 and 2000 indexes. Our findings suggest that passive mutual funds influence firms' governance choices, resulting in more independent directors, removal of takeover defenses, and more equal voting rights. Passive investors appear to exert influence through their large voting blocs, and consistent with the observed governance differences increasing firm value, passive ownership is associated with improvements in firms' longer-term performance.

AB - Passive institutional investors are an increasingly important component of U.S. stock ownership. To examine whether and by which mechanisms passive investors influence firms' governance, we exploit variation in ownership by passive mutual funds associated with stock assignments to the Russell 1000 and 2000 indexes. Our findings suggest that passive mutual funds influence firms' governance choices, resulting in more independent directors, removal of takeover defenses, and more equal voting rights. Passive investors appear to exert influence through their large voting blocs, and consistent with the observed governance differences increasing firm value, passive ownership is associated with improvements in firms' longer-term performance.

KW - Corporate governance

KW - Institutional ownership

KW - Passive funds

KW - Performance

UR - https://www.scopus.com/pages/publications/84962743495

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JO - Journal of Financial Economics

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IS - 1

ER -

Passive investors, not passive owners

Abstract

Keywords

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