Does passive ownership affect corporate governance? Evidence from the Bank of Japan’s ETF purchasing program

Abstract

We show that passive ownership improves the corporate governance of listed companies utilizing the large-scale equity exchange-traded fund (ETF) purchase program by the Bank of Japan (BOJ). The program provides a cross-sectional variation in the ownership by passive ownership. The empirical findings reveal that firms with high passive ownership are more likely to dismantle anti-takeover defenses, introduce executive stock options, have a high ratio of outside directors and female board members, and have small boards. Furthermore, our empirical results show that passive ownership dismantles Japanese historical closed ownership structures. These results are robust using alternative definitions and under a variety of subsamples. These findings suggest that passive ownership contributes to improved corporate governance practices among listed companies.