The Economics of Investor Engagement

Abstract

Institutional investors engage with their portfolio companies to communicate information and preferences with corporate managers. We provide the first estimates of the costs and benefits of engagement using a discrete choice model and novel data on engagement. On average, $10,000 spent on engagement leads to a 0.3 bps expected increase in firm value. However, the costs and benefits vary significantly across funds and firms. Passive funds engage less than active funds due to lower fees. Counterfactual simulations show that as active funds shrink and passive investing rises, engagement generates more value for investors and society because active funds exhibit diseconomies of scale but passive funds do not. The results establish the importance of economic incentives as a driver of value creation by institutional investors.