Passive Investors, Not Passive Owners*

Passive institutional investors are a growing and increasingly important component of institutional holdings. To examine whether and by which mechanisms passive investors influence firms ’ governance structure, we use an instrumental variable estimation and exploit variation in passive institutional ownership that results from stocks being assigned to either the Russell 1000 or 2000 index. We find that an increase in ownership by passive institutions is associated with more independent directors, the removal of poison pills and restrictions on shareholders ’ ability to call special meetings, and fewer dual class share structures. Passive investors appear to exert influence through their large voting blocs—passive ownership is associated with less support for management proposals and more support for shareholder-initiated governance proposals. While we do not find direct evidence that the increased presence of passive investors facilitates activism by other investors, we do find that ownership by passive investors is associated with corporate policies that are likely to mitigate the prospect of an activist campaign, including less cash holdings and higher dividend payouts. In contrast to conventiona