Passive investors and loan spreads

Konrad Adler, Sebastian Doerr and Sonya Zhu

No 1330, BIS Working Papers from Bank for International Settlements

Abstract: Over the past decades, index funds have amassed substantial ownership stakes in publicly traded firms. Index funds' rapid growth raises questions about their influence on governance and monitoring, as well as the consequences for other stakeholders. This paper examines how banks adjust their loan pricing when firms have a higher share of passive index fund investors as shareholders. Using syndicated loan data, we find that loan spreads increase with passive ownership and provide evidence consistent with higher loan spreads reflecting increased risk due to reduced shareholder oversight. Supporting this interpretation, we find stronger effects among firms in which shareholder oversight has more impact. However, the increase in loan spreads is not fully accounted for by changes in firm risk. Suggestive evidence points towards banks increasing their monitoring efforts in response to changes in shareholder composition, which is costly and reflected in loan spreads.

Keywords: passive ownership; institutional investors; bank monitoring; syndicated loans (search for similar items in EconPapers)
JEL-codes: G21 G23 G32 (search for similar items in EconPapers)
Date: 2026-02
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