Passive Ownership and Market Discipline
Abstract: Exploiting idiosyncratic capital flows to the "Big Three" asset managers within a granular instrumental variable framework, I study how passive institutional ownership affects the disciplinary function of equity markets among publicly listed U.S. companies over the period 1990 to 2024, finding that passive ownership causally increases zombie incidence and prolongs zombie spells. To organize the mechanism within a unified theoretical framework, I develop a three-player sequential game in which the asymmetric monitoring costs of passive and active investors generate an asymmetric governance fingerprint as a subgame perfect Nash equilibrium outcome. The model delivers testable predictions that the empirical analysis confirms: passive investors reduce poison pill adoption through standardised proxy voting, while failing to prevent golden parachutes and supermajority requirements from accumulating, provisions that require firm-specific engagement to resist. Shielded from removal threats, managers default to the quiet life, resulting in a causal decline in revenue productivity of approximately 2.6% per percentage point increase in passive ownership, confirmed by a null effect on markups. These findings reveal a structural paradox: the institutional shift that democratised investing has simultaneously weakened the disciplinary function of equity ownership, distorting market selection and impeding the reallocation of resources toward more productive uses.
Presentations: CSEF PhD Seminar (July 2025, March 2026); Saïd Business School, University of Oxford Finance Seminar (June 2026); 9th Dauphine-CEPR Finance PhD Workshop (June 2026*); 10th International PhD Meeting in Economics (July 2026*); Naples School of Economics 5th PhD Workshop (September 2026*); 7th RCF-ECGI Corporate Finance and Governance Conference (October 2026*).
Awards: Best Research Poster Award, Oxford Saïd Research and Teaching Excellence Awards Gala (2025).
* Scheduled
Competitive Effects of Asymmetric Overlapping Ownership (with Patrick Arnold)
Mergers in Markets with Overlapping Ownership: Indirect Effects and Policy Implications (with Patrick Arnold)