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Passive Investors and Loan Spreads

Author

Listed:
  • Konrad Adler

    (University of St. Gallen - School of Finance; Swiss Finance Institute)

  • Sebastian Doerr

    (Bank for International Settlements; Centre for Economic Policy Research (CEPR))

  • Xingyu Sonya Zhu

    (Bank for International Settlements (BIS) - Monetary and Economic Department)

Abstract

Over the past decades, index funds have amassed substantial ownership stakes in publicly traded firms, which raises questions about their influence on governance and monitoring. 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 well-governed and informationally opaque firms, where shareholder oversight is more impactful. However, the increase in loan spreads is not fully accounted for by changes in traditional measures of firm risk. Suggestive evidence points towards banks increasing their monitoring intensity in response to changes in shareholder composition, which is costly and reflected in loan spreads.

Suggested Citation

  • Konrad Adler & Sebastian Doerr & Xingyu Sonya Zhu, 2025. "Passive Investors and Loan Spreads," Swiss Finance Institute Research Paper Series 25-105, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp25105
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    Keywords

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    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

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