Date of Award
2025
Degree Type
Dissertation
Degree Name
Doctor of Business Administration (DBA)
Specialization
Finance
Department
General Business
First Advisor
Georges Tsafack
Abstract
This research investigates the far-reaching effects of the rise in passive institutional ownership on key dimensions of equity market behavior, including stock valuation, short-selling dynamics, and corporate ESG (Environmental, Social, and Governance) practices. Over the past two decades, the proliferation of passive investment vehicles, particularly exchange-traded funds (ETFs) and index funds - has reshaped the structure of public equity markets. What began as a low-cost portfolio strategy has now grown to represent more than a quarter of equity assets under management, raising important questions about its influence on price formation, corporate behavior, and investor signaling.
The first study explores how passive ownership affects the price-to-earnings (P/E) valuation of publicly traded firms. Using a panel dataset of firm-quarter observations over a 20-year period, the analysis finds that firms with higher levels of passive ownership exhibit systematically different valuation multiples, suggesting that indexing may attenuate price discovery or dilute the informational responsiveness of stock prices.
The second paper examines how passive ownership alters the market’s interpretation of short-selling activity. Using an event study framework centered around the release of short interest data, cumulative abnormal returns (CAR) are analyzed in relation to both short interest and passive ownership. The results show that while short interest is positively associated with returns in low-passive ownership firms, it becomes a strong negative signal in high-passive firms - highlighting the moderating role of ownership structure in how the market responds to informed trading activity.
The third study focuses on whether increasing passive ownership influences corporate ESG behavior. Leveraging MSCI’s ESG scoring data, the findings indicate that firms experiencing growth in passive ownership tend to improve their ESG performance. This suggests that passive investors, despite their reputation for disengagement, may still exert indirect pressure through voting practices or heightened stakeholder visibility.
Collectively, these studies underscore how the dramatic expansion of passive investing is altering the landscape of equity markets. Future research will explore how emerging forces - such as social media sentiment and algorithmic indexing - interact with passive ownership to influence market efficiency, firm strategy, and investor behavior.
Recommended Citation
Fellingham, John H., "THREE ESSAYS ON HOW PASSIVE OWNERSHIP OF STOCKS IS RESHAPING MARKET MICROSTRUCTURE AND TRADITIONAL CORPORATE FINANCE METRICS" (2025). Open Access Dissertations. Paper 4495.
https://digitalcommons.uri.edu/oa_diss/4495