Passive institutional ownership and managerial incentives

Abstract

The substantial increase in passive institutional ownership of U. S. firms raises debate on the role of passive investors on corporate governance. In this paper, I examine the impact of passive institutional investors on managerial incentives by exploiting the plausibly exogenous variation in ownership by passive funds induced by Russell 1000/2000 index reconstitution. Consistent with the view that passive funds require steeper managerial incentives to mitigate agency problems, I find that exogenous increases in passive institutional ownership lead to higher sensitivity of CEO wealth to stock price but lower cash-based compensation. The results are stronger when firm’s other governance mechanisms are less efficient and when CEO’s stock ownership is lower. Overall, this paper improves our understanding of the role of passive institutional investors in shaping managerial incentives.

Date of Award	2018
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology