Passive Ownership and Market Selection: Evidence from U.S. Zombie Companies
Abstract: Using a panel of U.S. public firms (1990-2024), this study examines how the rise of passive ownership distorts market selection, contributing to the creation and survival of zombie firms. To establish causality, I employ a Granular Instrumental Variable framework (Gabaix and Koijen, 2024) leveraging idiosyncratic liquidity shocks of the "Big Three". I find that an exogenous increase in passive ownership drives a deterioration in structural firm productivity, effectively trapping firms in a state of financial and operational stagnation. This trap is sustained by two distinct mechanisms. First, a governance vacuum: within-firm estimates show that passive capital reduces CEO pay-performance sensitivity, insulating entrenched management and allowing them to pursue a "quiet life" at the expense of efficiency. Second, a credit channel: contrary to traditional evergreening narratives, creditors penalize this lack of internal oversight by demanding higher loan spreads, especially in stable environments where market turbulence cannot substitute for monitoring. Finally, survival analysis reveals that passive capital significantly prolongs ongoing zombie spells.