We find that short sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing.

The theoretical and empirical literature suggests that CEO might not make risky long-term investments if the CEO believes that the benefit of such investments would not materialize or is not recognized by the market until after the CEO has retired. This paper tests the predictions of the Acharya, Myers, and Rajan (2011) internal governance model to counteract the CEO’s tendency to forego such investments on a sample of voluntary CEO turnovers. We find that the optimal level of sharing of tasks between the CEO and her top-management team, the firm’s internal governance, is dependent on the CEO’s career horizon. Additionally, we find the effect of internal governance only matters for older CEOs. We also find that the closer the internal governance is to the optimal level, the smaller is the underinvestment for an older outgoing CEO. We find that the new incoming CEO divests profitably the assets acquired under good internal governance. Finally, we find that optimal internal governance is found to have positive effects on corporate innovation. Our results are robust to continuous matching by generalized propensity score and controlling for the CEO’s explicit pay-performance sensitivity, succession plan, and pay duration.