2026 Theses Doctoral

Passive Ownership and the Value Effect

Song, Min Jun

This study investigates whether passive ownership has weakened the positive association between adjusted book-to-price ratios and future stock returns, known as the value effect. Using firm-level panel data over the past 30 years, I document a strong negative association between passive ownership and the value effect. To corroborate the association results, I exploit the Pension Protection Act (PPA) of 2006, which spurred investments in index funds through Target Date Funds (TDFs).

I find that the attenuation of the value effect intensifies with exposure to TDF flows, which are unlikely to reflect active firm-level fundamental analysis. Moreover, the negative relation between passive ownership and the value effect emerged with the PPA in 2006, preceding the 2008 financial crisis. In cross-sectional analyses, I find that the decline of the value effect is more pronounced for firms with low information production activity in capital markets and limited shareholder payouts.

Finally, passive ownership weakens the value effect more strongly when non-index funds are net sellers, suggesting that withdrawals from actively managed funds reinforce the attenuation of the value effect. Collectively, the findings suggest that the relatively fundamentals-agnostic nature of passive ownership has eroded the value effect in the U.S. stock market.