Does passive investment have a positive governance effect? Evidence from index funds ownership and corporate innovation

Abstract

Using Chinese listed companies' data from 2007 to 2017, this study finds that companies with a higher proportion of index fund ownership are more innovative, implying that passive institutional investors positively influence company governance. The effect is stronger in private firms, high-tech firms, and firms in high marketization regions and prominent mainly in large-cap index funds. Index fund ownership reduces the stock turnover rate, stabilizes shareholder structure, and lowers managers turnover rates, mitigating managers’ myopic behavior and boosting innovation. This study documents empirical evidence on the positive effect of passive investors on corporate governance from the perspective of corporate innovation.