Corporate Governance in the Presence of Active and Passive Delegated Investment

Abstract

We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and asset management fees are endogenously determined. Funds'ownership stakes and asset management fees determine their incentives to engage in governance. Whether passive fund growth improves aggregate governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even if accompanied by lower passive fund fees, whereas in the latter case, it improves governance only if it does not increase fund investors' returns too much. Regulations that decrease funds' costs of engaging in governance may decrease total welfare. Moreover, even when such regulations are welfare improving and increase …rm valuations, they can be opposed by both fund investors and fund managers.