In this paper we study the semantics of the parameter passing mechanism in algebraic specification languages. More precisely, this problem is studied for parameterized data types and parameterized specifications. The given results include the extension of the model functor (which is useful for correctness proofs) and the semantic properties of the result of inserting actual parameters into parameterized specifications. In particular, actual parameters can be parameterized and the result is nested parameterized specification. Correctness of an applied (matrix(int)) or a nested (bintree(string())) parameterized specification is shown given correctness of the parts. The formal theory in this paper is restricted to the basic algebraic case where only equations are allowed in the parameter declaration and parameter passing is given by specification morphisms. But we also give the main ideas of a corresponding theory with requirements where we allow different kinds of restrictions in the parameter declaration. © 1984.