IDEAS home Printed from https://ideas.repec.org/p/bis/biswps/1330.html

Passive investors and loan spreads

Author

Listed:
  • Konrad Adler
  • Sebastian Doerr
  • Sonya Zhu

Abstract

Over the past decades, index funds have amassed substantial ownership stakes in publicly traded firms. Index funds' rapid growth raises questions about their influence on governance and monitoring, as well as the consequences for other stakeholders. This paper examines how banks adjust their loan pricing when firms have a higher share of passive index fund investors as shareholders. Using syndicated loan data, we find that loan spreads increase with passive ownership and provide evidence consistent with higher loan spreads reflecting increased risk due to reduced shareholder oversight. Supporting this interpretation, we find stronger effects among firms in which shareholder oversight has more impact. However, the increase in loan spreads is not fully accounted for by changes in firm risk. Suggestive evidence points towards banks increasing their monitoring efforts in response to changes in shareholder composition, which is costly and reflected in loan spreads.

Suggested Citation

  • Konrad Adler & Sebastian Doerr & Sonya Zhu, 2026. "Passive investors and loan spreads," BIS Working Papers 1330, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1330
    as

    Download full text from publisher

    File URL: https://www.bis.org/publ/work1330.pdf
    File Function: Full PDF document
    Download Restriction: no
    File URL: https://www.bis.org/publ/work1330.htm
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Billett, Matthew T. & Jiang, Zhan & Lie, Erik, 2010. "The effect of change-in-control covenants on takeovers: Evidence from leveraged buyouts," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 1-15, February.
    2. Demerjian, Peter R. & Owens, Edward L., 2016. "Measuring the probability of financial covenant violation in private debt contracts," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 433-447.
    3. Itzhak Ben‐David & Francesco Franzoni & Rabih Moussawi, 2018. "Do ETFs Increase Volatility?," Journal of Finance, American Finance Association, vol. 73(6), pages 2471-2535, December.
    4. Lucian A. Bebchuk & Scott Hirst, 2019. "Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy," NBER Working Papers 26543, National Bureau of Economic Research, Inc.
    5. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    6. Acharya, Avidit & Blackwell, Matthew & Sen, Maya, 2016. "Explaining Causal Findings Without Bias: Detecting and Assessing Direct Effects," American Political Science Review, Cambridge University Press, vol. 110(3), pages 512-529, August.
    7. Sebastian Doerr & Stefan Gissler & José‐Luis Peydró & Hans‐Joachim Voth, 2022. "Financial Crises and Political Radicalization: How Failing Banks Paved Hitler's Path to Power," Journal of Finance, American Finance Association, vol. 77(6), pages 3339-3372, December.
    8. Yen-Cheng Chang & Harrison Hong & Inessa Liskovich, 2015. "Regression Discontinuity and the Price Effects of Stock Market Indexing," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 212-246.
    9. Chinco, Alex & Sammon, Marco, 2024. "The passive ownership share is double what you think it is," Journal of Financial Economics, Elsevier, vol. 157(C).
    10. Ferreira, Daniel & Ferreira, Miguel A. & Mariano, Beatriz, 2018. "Creditor control rights and board independence," LSE Research Online Documents on Economics 84463, London School of Economics and Political Science, LSE Library.
    11. Ian R Appel & Todd A Gormley & Donald B Keim, 2019. "Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2720-2774.
    12. Gustafson, Matthew T. & Ivanov, Ivan T. & Meisenzahl, Ralf R., 2021. "Bank monitoring: Evidence from syndicated loans," Journal of Financial Economics, Elsevier, vol. 139(2), pages 452-477.
    13. Sudheer Chava & Dmitry Livdan & Amiyatosh Purnanandam, 2009. "Do Shareholder Rights Affect the Cost of Bank Loans?," The Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 2973-3004, August.
    14. Alan D. Crane & Sébastien Michenaud & James P. Weston, 2016. "Editor's Choice The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds," The Review of Financial Studies, Society for Financial Studies, vol. 29(6), pages 1377-1408.
    15. Brav, Alon & Malenko, Andrey & Malenko, Nadya, 2022. "Corporate Governance Implications of the Growth in Indexing," CEPR Discussion Papers 17732, C.E.P.R. Discussion Papers.
    16. Sharjil M. Haque & Simon Mayer & Teng Wang, 2024. "How Private Equity Fuels Non-Bank Lending," Finance and Economics Discussion Series 2024-015, Board of Governors of the Federal Reserve System (U.S.).
    17. Cerutti, Eugenio & Hale, Galina & Minoiu, Camelia, 2015. "Financial crises and the composition of cross-border lending," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 60-81.
    18. Sergio A. Correia & Stephan Luck & Emil Verner, 2024. "Why Do Banks Fail? Bank Runs Versus Solvency," Liberty Street Economics 20241125, Federal Reserve Bank of New York.
    19. Doerr, Sebastian & Schaz, Philipp, 2021. "Geographic diversification and bank lending during crises," Journal of Financial Economics, Elsevier, vol. 140(3), pages 768-788.
    20. Daniel Ferreira & Miguel A. Ferreira & Beatriz Mariano, 2018. "Creditor Control Rights and Board Independence," Journal of Finance, American Finance Association, vol. 73(5), pages 2385-2423, October.
    21. Boone, Audra L. & White, Joshua T., 2015. "The effect of institutional ownership on firm transparency and information production," Journal of Financial Economics, Elsevier, vol. 117(3), pages 508-533.
    22. Iván Alfaro & Nicholas Bloom & Xiaoji Lin, 2024. "The Finance Uncertainty Multiplier," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 577-615.
    23. Adrian Buss & Savitar Sundaresan & Holger Mueller, 2023. "More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency," The Review of Financial Studies, Society for Financial Studies, vol. 36(12), pages 4713-4758.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeCoste, Joseph, 2025. "Comovement and S&P 500 membership," Global Finance Journal, Elsevier, vol. 65(C).
    2. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    3. Dong, Yunhe & Luo, Haoyi & Xu, Zijin & Yang, Xing, 2024. "Investing while lending: Do index funds improve managerial information disclosure?," International Review of Financial Analysis, Elsevier, vol. 94(C).
    4. Azar, José & Duro, Miguel & Kadach, Igor & Ormazabal, Gaizka, 2021. "The Big Three and corporate carbon emissions around the world," Journal of Financial Economics, Elsevier, vol. 142(2), pages 674-696.
    5. Caleb Rawson & Stephen P. Rowe, 2024. "The power of not trading: Evidence from index fund ownership," Review of Accounting Studies, Springer, vol. 29(1), pages 388-422, March.
    6. In Ji Jang & Namho Kang, 2024. "ETF and corporate reporting," The Financial Review, Eastern Finance Association, vol. 59(2), pages 293-323, May.
    7. Sai, Masumi & Yamada, Kazuo, 2025. "Does passive ownership affect corporate governance? Evidence from the Bank of Japan’s ETF purchasing program," Research in International Business and Finance, Elsevier, vol. 77(PB).
    8. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2019. "An Improved Method to Predict Assignment of Stocks into Russell Indexes," Swiss Finance Institute Research Paper Series 19-56, Swiss Finance Institute.
    9. Lin, Luca Xianran, 2022. "Great Trees are Good for Shade: Creditor Monitoring Under Common Ownership," Finance Research Letters, Elsevier, vol. 44(C).
    10. Chen, Tao & Dong, Hui & Lin, Chen, 2020. "Institutional shareholders and corporate social responsibility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 483-504.
    11. Pekka Honkanen & Daniel Schmidt & Bastian von Beschwitz, 2022. "Passive Ownership and Short Selling," International Finance Discussion Papers 1365, Board of Governors of the Federal Reserve System (U.S.).
    12. Jun Wang & Qijian Wang, 2021. "Influence or Preference? A New Look at Institutional Ownership and Earnings Management," Businesses, MDPI, vol. 1(3), pages 1-17, October.
    13. Hyoseok (David) Hwang, 2023. "The real effects of local mutual funds: Evidence from corporate innovation," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 272-300, June.
    14. Coles, Jeffrey L. & Heath, Davidson & Ringgenberg, Matthew C., 2022. "On index investing," Journal of Financial Economics, Elsevier, vol. 145(3), pages 665-683.
    15. Benjamin Bennett & René M. Stulz & Zexi Wang, 2020. "Does Joining the S&P 500 Index Hurt Firms?," NBER Working Papers 27593, National Bureau of Economic Research, Inc.
    16. Ambrocio, Gene & Colak, Gonul & Hasan, Iftekhar, 2022. "Commitment or constraint? The effect of loan covenants on merger and acquisition activity," Finance Research Letters, Elsevier, vol. 47(PB).
    17. Agarwal, Vikas & Hanouna, Paul & Moussawi, Rabih & Stahel, Christof W., 2021. "Do ETFs increase the commonality in liquidity of underlying stocks?," CFR Working Papers 21-04, University of Cologne, Centre for Financial Research (CFR).
    18. Kiesewetter, Dirk & Manthey, Johannes, 2017. "The relationship between corporate governance and tax avoidance - evidence from Germany using a regression discontinuity design," arqus Discussion Papers in Quantitative Tax Research 218, arqus - Arbeitskreis Quantitative Steuerlehre.
    19. Wei, Wei & Young, Alex, 2025. "Beyond Russell reconstitution: A re-examination of methodologies for natural experiments," Journal of Corporate Finance, Elsevier, vol. 91(C).
    20. Chang, Eric C. & Lin, Tse-Chun & Ma, Xiaorong, 2019. "Does short-selling threat discipline managers in mergers and acquisitions decisions?," Journal of Accounting and Economics, Elsevier, vol. 68(1).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:biswps:1330. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Martin Fessler (email available below). General contact details of provider: https://edirc.repec.org/data/bisssch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.