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Abstract
This paper examines the corporate stewardship behavior of major index funds, focusing particularly on the “Big Three” - BlackRock, Vanguard, and State Street. Through a critical analysis of Bebchuk and Hirst’s (2019) agency-costs framework, the study investigates how these passive investment giants approach their fiduciary responsibilities and corporate governance duties. The paper finds compelling evidence that index funds systematically underinvest in stewardship activities due to competitive industry dynamics and fee structures that create misaligned incentives. Building on this analysis, the study extends the theoretical framework to consider how index funds might behave during periods of financial distress, particularly in cases where they hold both equity and fixed-income positions in distressed firms. The paper concludes by proposing an empirical framework for future research into index fund behavior during bankruptcy proceedings, while highlighting the growing importance of understanding passive investor governance as institutional ownership becomes increasingly concentrated.