DP15230 Corporate governance in the presence of active and passive delegated investment

Author(s): Adrian Aycan Corum, Andrey Malenko, Nadya Malenko
Publication Date: August 2020
Date Revised: February 2021
Keyword(s): Competition, corporate governance, delegated asset management, engagement, Index funds, investment stewardship, passive funds
JEL(s): G11, G23, G34, K22
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15230

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.