The Economics of Investor Engagement

Investors engage with portfolio companies to communicate information and preferences. Using a discrete choice model and hand-collected data from stewardship reports, we show engagement is primarily driven by financial rather than reputational or marketing considerations. Investors behave as if $10,000 spent on engagement increases firm value by 0.35 basis points. Passive investors engage less because their lower fees reduce the value they capture. Counterfactual simulations show the impact of rising passive investment depends on how passive assets grow: when passive investors grow through flows from active investors, engagement-driven value creation increases, whereas growth through consolidation reduces engagement and value creation.