Passive Investment and Stock Repurchase Activity

Abstract

We investigate the association between passive investment and share repurchases, both at historically high levels and the subject of scrutiny. We report that firms with more passive ownership exhibit higher levels of repurchase activity, including repurchases resulting in reported earnings that meets or beats analysts’ earnings forecasts. We also find that repurchase activity more negatively affects firms’ future employment, capital expenditures, and performance when the firm has more passive owners. We conclude that passive investment is associated with an increase in the quantity and a reduction in the quality of firms’ repurchase activities.