Since the 2008 financial crisis, more and more investors have moved their money from actively managed funds to passive index funds.

This shift has led to the rapid growth of three massive asset managers—BlackRock, Vanguard, and State Street—known as the “Big Three.”

Together, these firms are now the biggest shareholders in over 40% of publicly traded U.S. companies and control 88% of the S&P 500.

These numbers have caught the attention of politicians, regulators, and researchers. Many people are concerned about the long-term effects of such concentrated ownership.

Two accounting professors, Sebahattin Demirkan and Ted F. Polat, recently studied how the Big Three influence a key financial measure: the cost of equity, which reflects how risky investors think a company is.

The cost of equity: why it matters

For individuals, a high credit rating means borrowing money at lower interest rates.

The same applies to companies—if a company has good financial transparency and governance, it can borrow money at lower costs and attract investors with lower dividend expectations.

Amazon, for example, has never paid a dividend because investors trust its financial health.

Demirkan and Polat wanted to find out if high ownership by the Big Three is a good or bad sign for the market. They studied financial data from 4,836 U.S. companies between 1997 and 2016, focusing on three key risks that affect the cost of equity:

1. Agency Risk – Poor corporate governance practices.
2. Informational Asymmetry – Lack of transparency about financial details.
3. Liquidity Risk – How easily shares can be bought or sold.

Mixed effects: The pros and cons of passive ownership

Their research found that as the Big Three’s ownership in a company increased, agency risk also increased. This happens because passive investors don’t actively manage companies or push for better performance. They simply aim to match the market rather than improve individual firms.

However, the study also found that more passive ownership reduced informational asymmetry and liquidity risk. Large institutional investors like the Big Three encourage companies to be more open in their financial reports and disclosures. They can pressure managers to release more frequent earnings reports and SEC filings, improving transparency.

In general, a moderate increase in passive ownership can lower a company’s cost of equity if the company is already liquid and transparent. But for firms with low liquidity, the benefits are less clear. One downside of passive investing is that it can reduce liquidity since there is less active buying and selling. This can be both good and bad—during tough economic times, lower trading volume can protect companies, but during good times, they may miss out on opportunities.

The growing influence of the Big Three raises concerns about the future of financial markets. If passive investors continue to dominate, the stock market could become less democratic. Instead of a diverse range of investors shaping the market, a small group of executives from these large firms could end up controlling capital markets.

Demirkan believes that corporate leaders and policymakers should work to maximize the strengths of passive investing—such as its long-term focus, which can support environmental and social responsibility—while limiting its downsides.

“At the end of the day, we must think about the whole society, not just shareholders,” he says. “If only passive investors existed, the CEOs of the Big Three would have too much control. Instead of a free market, we would have a financial kingdom.”

While passive investing offers stability and transparency, unchecked growth could lead to unintended consequences. Experts agree that finding a balance is key to ensuring a fair and efficient market for all.