The Big Three Passive Investors and the Cost of Equity Capital

Sebahattin Demirkan () and Ted M. Fikret Polat
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Sebahattin Demirkan: Costello College of Business, George Mason University, Fairfax, VA 20230, USA
Ted M. Fikret Polat: Costello College of Business, George Mason University, Fairfax, VA 20230, USA

JRFM, 2025, vol. 18, issue 2, 1-24

Abstract: This study investigates the role of the Big Three passive investors (BlackRock, Vanguard, and State Street) in influencing firms’ cost of equity. By examining the unique ownership structure these investors bring, the research sheds light on a pivotal yet underexplored aspect of institutional ownership and its implications for corporate financing. Using a comprehensive dataset spanning from 1997 to 2016, this study demonstrates that increased ownership by the Big Three is associated with improved disclosure practices and reduced information asymmetry, leading to a lower cost of equity. However, the study also uncovers a nuanced trade-off, as concentrated ownership may introduce liquidity risks in certain contexts. These findings bridge a critical gap in the literature by reconciling divergent perspectives on the role of passive investors and provide actionable insights for institutional investors, regulators, and corporate managers seeking to understand the broader implications of passive ownership on firm valuation and financing strategies.

Keywords: institutional investors; implied cost of capital; passive investors (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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