The Economics of Investor Engagement

Institutional investors engage with their portfolio companies to communicate information and preferences. Using a discrete choice model and novel engagement data, we quantify the costs and benefits of engagement and document substantial heterogeneity across funds and firms. Passive funds engage less than active funds because their lower fees reduce the value they capture. Counterfactual scenarios show that when passive funds gain market share from active funds, the value created through engagement increases because active funds exhibit diseconomies of scale while passive funds do not. However, when passive funds grow through consolidation with active funds, the total value created through engagement declines.