Since the 2008 financial crisis, investors have moved their money from actively managed funds to passive index funds at a rapid pace. This shift has turned the “Big Three” asset managers—BlackRock, Vanguard, and State Street—into financial giants. Together, they are the biggest shareholders in over 40% of publicly traded U.S. companies and hold 88% of the S&P 500.
This concentration of ownership has raised concerns among politicians, regulators, and academics. A study from George Mason University examines how Big Three dominance affects the cost of equity—a key measure of corporate risk.
A sign of trust?
For companies, as for individuals, creditworthiness affects borrowing costs. A firm with strong transparency and governance can raise money more cheaply, just as a person with a high credit score can get lower-interest loans. The study asks whether Big Three ownership is a sign of trust or a cause for concern in financial markets.
Looking at data from 4,836 U.S. firms from 1997 to 2016, the researchers focused on three types of equity risk: agency risk (which comes from weak corporate governance), informational asymmetry, and liquidity risk. The results were mixed. More passive ownership was linked to higher agency risk—expected, since index funds track the market instead of pushing companies to perform better.
At the same time, Big Three investors reduced informational asymmetry and liquidity risk. Large institutions can pressure firms to disclose more, issuing more frequent earnings reports and regulatory filings. This improves transparency and reassures investors.
Company specific
The effects of passive ownership depend on the company. For firms with good liquidity and investor communication, it lowers the cost of equity. But in companies with low liquidity, the benefits shrink. Passive investing reduces trading volume, which can stabilize prices in downturns but limit gains in boom times.
These trade-offs highlight the growing influence of the Big Three. Their power extends beyond markets into corporate governance and public policy. Critics warn that too much passive ownership could give a few asset managers too much control, weakening competition and shareholder rights.
The study’s authors argue for balance. Policymakers and corporate leaders should make the most of passive ownership’s benefits—such as its focus on long-term goals like environmental and social responsibility—while keeping its risks in check. If not, capital markets could become less of a free market and more of an oligarchy run by a few financial firms.
