Essays on impact of passive ownership on managerial decision-making

Guide(s)

Panchapagesan, Venkatesh

Department

Finance and Accounting

Area

Finance and Accounting

University

Indian Institute of Management Bangalore

Place

Bangalore

Publication Date

3-31-2025

Year Awarded

March 2025

Year Completed

March 2025

Year Registered

June 2021

Abstract

There has been a substantial growth in passive ownership in financial markets. Passive ownership refers to investing in firms through index mutual funds. Passive ownership growth is a global phenomenon, with a size of $8 trillion or 20% of aggregate investment fund assets as of June 2017 (Sushko and Turner (2018)). Across countries, the U.S. equity market has seen the most prominent growth in passive ownership, with index mutual fund total net assets growing significantly, from $384 billion in 2000 to $4.8 trillion in 2022. As of 2021, passive investors held around 33.5% of the U.S. stock market (Chinco and Sammon (2024)). Market estimates show that passive investing will overtake active investing by 2026. Current literature debates the cost and benefits of passive ownership for financial markets and corporate firms. Passive owners, unlike their active counterparts, have fewer incentives to engage in stock-picking, as they have to replicate an index in their portfolio formation. Thus, passive ownership is associated with lower information acquisition, has constraints on trading based on information, and has implications for the firm’s information environment and governance. On the other hand, managers rely on external information and monitoring to make value-maximizing decisions, such as investments, mergers and acquisitions, capital allocation, and disclosures (Bond et al. (2012)). Therefore, passive ownership, having implications for financial markets through their trading constraints, can affect managerial decision-making through agency and informational channels (Bond et al. (2012),Goldstein (2023)). Existing studies show that passive owners have implications for corporate governance (Appel et al. (2016), Schmidt and Fahlenbrach (2017)), stock price informativeness (Buss and Sundaresan (2023), Sammon (2024)), and financial reporting (Rawson and Rowe (2024)). In my thesis, I study the impact of the growth in passive ownership on a series of managerial decisions, such as investments and mergers and acquisitions (M&As). In the first chapter of my thesis, I provide a detailed literature review of the growing literature on passive ownership. Based on its implications, I classify the literature on passive passive ownership into three dimensions. First is passive ownership’s effect on corporate governance, then on financial markets, and finally on its implications for managerial decision-making. This detailed synthesis of the literature on passive ownership helps to understand the theories and channels through which passive ownership has implications for corporate and managerial decision-making, enables one to find the gap in the literature, and lays the path for future research in this growing area of passive ownership. In the second chapter, I examine the impact of growth in passive ownership on firms’ investment efficiency. In particular, I empirically analyze the effect of passive ownership on managerial learning from stock price through investment-price sensitivity. Current literature on passive owners’ impact on stock price informativeness provides competing views, and thus, the effect of passive owners on managerial learning is inconclusive and has not been examined thoroughly. I fill this gap and empirically show that passive owners negatively affect managerial learning from stock prices, such that firms with higher passive ownership have lower investment-price sensitivity. I address endogeneity and establish causality using an instrumental variable approach, where I exploit the Russell 1000/2000 index switching by firms as an exogenous shock to passive owners. This weaker managerial learning due to increased passive ownership increases the likelihood of under-investment, leading to sub-optimal investment decisions by firms. I also provide evidence of two mechanisms (price informativeness and feedback channel) through which passive owners negatively impact firms’ managerial learning and investment efficiency. In my third chapter, I examine how passive ownership affects acquisition decisions. I hypothesize that passive ownership affects the information environment of the acquirer’s stock, hindering its usefulness as an acquisition currency and as a source of information for deal completion. As hypothesized, I find that acquirers with high passive ownership have less stock in their deal payment and a lower likelihood of withdrawal based on market feedback. Further, non-stock information such as proximity and industry relatedness mitigates the impact of passive ownership. I use Russell 1000/2000 index switching as an instrumental variable to passive ownership, address endogeneity, and establish causality.

Pagination

ix, 104p.

Copyright

Indian Institute of Management Bangalore

Document Type

Dissertation

DAC Chairperson

Panchapagesan, Venkatesh

DAC Members

Rangan, Srinivasan; Jindal, Varun; Deb, Soudeep; Kedia, Simi

Type of Degree

Ph.D.

Relation

DIS-IIMB-FPM-P25-10

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