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Corp. Governance and CSR > Passive Ownership > Flashcards

Passive Ownership Flashcards

1
Q

What are passive investors?

A

Passive investors include indexed mutual funds and ETFs that replicate benchmark indices with minimal expenses.

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2
Q

Why has passive investing grown in popularity?

A

Due to its low costs and the difficulty of consistently beating the market.

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3
Q

How does passive ownership affect investment decisions?

A

It makes investment choices insensitive to stock-specific information.

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4
Q

What is the prediction for passive investment’s market share by 2024?

A

Expected to exceed 50%

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5
Q

Why does passive investing raise concerns for capitalism, according to Peter Singer?

A

Small shareholders lack a voice, and large shareholders have no skin in the game.

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6
Q

How do passive investors potentially improve governance?

A

By holding large stakes, they are incentivized to monitor firms to enhance market performance.

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7
Q

Why are passive investors less able to influence firm-specific governance issues?

A

They focus on minimizing tracking errors and lack resources for deep monitoring.

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8
Q

How do passive investors typically vote on governance matters?

A

They often follow advice from proxy advisors like ISS.

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9
Q

What negative governance outcomes are linked to passive ownership?

A

Increased CEO power, poorer independent director appointments, and lower-quality acquisitions.

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10
Q

How is passive ownership measured in empirical studies?

A

By changes in institutional ownership using quasi-exogenous shocks like Russell index rebalancing.

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11
Q

What research strategy do studies use to isolate changes in passive ownership?

A

Exploiting the Russell index rebalancing as an external shock.

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12
Q

What is the Russell 1000 and Russell 2000?

A

The Russell 1000 includes the largest 1000 firms and the Russell 2000 includes the next largest 2000.

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13
Q

Why is rebalancing quasi-exogenous for firms near the threshold?

A

Firms near the cutoff cannot easily manipulate their ranking.

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14
Q

What is the impact of a 1pp increase in passive institutional ownership on CEO power?

A

It raises the likelihood of a CEO becoming chairman by 1.7% and president by 1.38%.

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15
Q

How do shareholders react to new independent directors under passive ownership?

A

They respond more negatively, suggesting poorer-quality appointments.

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16
Q

What is the market response to firm acquisitions under passive ownership?

A

Shareholders react more negatively, indicating lower-quality M&A decisions.

17
Q

What findings do Appel, Gormley, and Keim present about passive ownership?

A

They find positive governance outcomes, such as more independent directors and removal of takeover defenses.

18
Q

How does passive ownership improve voting equality?

A

By increasing the likelihood of equal voting rights through governance reforms.

19
Q

How can the contrasting impacts of passive ownership be reconciled?

A

Passive investors improve broad governance (low-cost), but neglect high-cost, firm-specific governance.

20
Q

Why is evaluating acquisition quality challenging for passive investors?

A

It requires continuous monitoring, which exceeds passive investors’ low-cost governance approach.

21
Q

How do passive investors’ fiduciary duties influence their governance roles?

A

They are obligated to exercise voting rights during annual meetings.

22
Q

Why can’t passive investors exit underperforming stocks?

A

They must replicate the benchmark index, holding stocks regardless of performance.

23
Q

What governance tools do passive investors primarily rely on?

A

Proxy advisors and standardized governance guidelines.

24
Q

Why might passive ownership reduce CEO accountability?

A

Due to limited direct monitoring and reliance on vote advisors.

25
Q

How does index inclusion affect passive institutional shareholding?

A

Firms added to a major index experience a jump in passive ownership.

26
Q

What is the long-term risk of passive ownership for corporate governance?

A

It may erode firm-specific accountability and decision-making quality.

27
Q

How does market performance relate to passive ownership monitoring?

A

Passive investors aim to improve overall market performance, not individual firms.

28
Q

What is the key finding from Schmid and Fahlenbrach?

A

Increased passive ownership leads to CEO entrenchment and poorer governance.

29
Q

What type of governance issues are less addressed by passive ownership?

A

High-cost, specific governance issues like acquisition quality and managerial evaluations.

30
Q

How can passive ownership benefit shareholders in the long term?

A

By ensuring broad-based, cost-effective governance improvements.

Corp. Governance and CSR (16 decks)

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