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Passive Investment and Share Repurchases

We investigate the association between passive investment and share repurchases, both at historically high levels and the subject of scrutiny. We argue passive investors offer little monitoring over managerial actions such as repurchase activities, so managers of firms with high levels of passive ownership likely exhibit more opportunism when making repurchase decisions. We report that firms with more passive ownership are more likely to repurchase, repurchase more shares and spend more money on repurchases. We also find that increased passive investment is positively associated with repurchases that result in reported earnings that meets or beats analysts’ earnings forecasts, or “suspect” repurchases. Finally, we investigate future outcomes of firms’ repurchases. We find that passive investment lowers the association between repurchases and firms’ future employment, capital expenditures, and performance. We conclude that passive investment is associated with an increase in the quantity and a reduction in the quality of firms’ repurchase activity.