Assistant Professor of Finance Ian Appel is the co-winner of a research competition for his jointly authored paper challenging the idea that so-called passive investors wield little influence in the marketplace.
Appel, along with Wharton School of Business faculty members Todd Gormley and Donald Keim, were recognized by the Investor Responsibility Research Center Institute (IRRCI), which said their work 鈥渉as the potential to reshape investor thinking.鈥� The paper is forthcoming in The Journal of Financial Economics.
Titled 鈥淧assive Investors, Not Passive Owners,鈥� the paper reveals how passive investors 鈥� those who typically manage index funds 鈥� aren鈥檛 really passive at all and in fact are more active behind the scenes.聽
鈥淲hen we think about investors who influence different corporate policies, we usually are talking about the Carl Icahns of the world and activist hedge funds,鈥� says Appel, who joined the Carroll School of Management last September. 鈥淭he message of our paper is that influence is not just limited to them. Passive investors 鈥� the Vanguards and State Streets 鈥� also have influence over how companies are run.
鈥淥ur findings contradict the perception that passive investors, who hold a large basket of stocks and attempt to track a benchmark index like the S&P 500, only care about tracking errors and keeping fees low. That鈥檚 not the case at all.鈥�
Appel and his co-authors found that passively managed mutual funds, and the institutions that offer them, use their large voting blocs to exert influence on firms鈥� governance.
鈥淏y owning shares, they have a fiduciary responsibility to their investors to vote in their best interests,鈥� says Appel. 鈥淭hat鈥檚 one reason why you may think they might make a difference and have an effect on the firms they own.鈥�
Appel says an investor doesn鈥檛 necessarily have to make a lot of noise to be heard; significant ownership of shares will do it.
鈥淚f you own a large share of a company, say 5 percent, and you call up the management, they鈥檒l take your call. And if you say, 鈥楾hese are the things we care about, these are the changes we鈥檇 like to see made in companies,鈥� they may be more inclined to listen to you when you own a big chunk of shares and they know you鈥檙e not going to sell off those shares any time soon.鈥�
That influence can lead to governance changes such as more independent directors on corporate boards, removal of takeover defenses and more equal voting rights.
鈥淥ur evidence suggests they successfully influence firms鈥� governance choices in ways that improve long-term, firm-level performance,鈥� says Appel. 鈥淰anguard talks about how they send a letter to many of their portfolio companies where they outline what they consider to be important aspects of corporate governance, and how companies are run.鈥�
Appel says the validity of the research was underscored when the comptroller of New York City 鈥� who oversees the city鈥檚 pension funds 鈥� spoke at the IRRCI conference where the award was presented.
鈥淗e said, 鈥楲isten we own pretty much every stock, and at the same time, we鈥檙e activist. We go and talk to companies, if they鈥檙e doing something we don鈥檛 like, we tell them about it.鈥欌��
Appel says he and his co-authors, who spent more than two years on the research, says the honor is a meaningful one. 鈥淭o get recognition from practitioners in the finance world and also from experts in other fields who helped with the judging is really gratifying.鈥�
By Sean Hennessy | News & Public Affairs