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Do Index Funds Monitor?
[Large shareholder activism, risk sharing, and financial market equilibrium]

Author

Listed:
  • Davidson Heath
  • Daniele Macciocchi
  • Roni Michaely
  • Matthew C Ringgenberg

Abstract

Passively managed index funds now hold over 30 of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.

Suggested Citation

  • Davidson Heath & Daniele Macciocchi & Roni Michaely & Matthew C Ringgenberg, 2022. "Do Index Funds Monitor? [Large shareholder activism, risk sharing, and financial market equilibrium]," Review of Financial Studies, Society for Financial Studies, vol. 35(1), pages 91-131.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:1:p:91-131.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab023
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    Cited by:

    1. Braun, Benjamin, 2021. "From exit to control: The structural power of finance under asset manager capitalism," SocArXiv 4uesc, Center for Open Science.
    2. Corum, Adrian Aycan & Malenko, Andrey & Malenko, Nadya, 2020. "Corporate Governance in the Presence of Active and Passive Delegated Investment," OSF Preprints 8n6xj, Center for Open Science.
    3. Shane S. Dikolli & Mary Margaret Frank & Zhe Michael Guo & Luann J. Lynch, 2022. "Walk the talk: ESG mutual fund voting on shareholder proposals," Review of Accounting Studies, Springer, vol. 27(3), pages 864-896, September.
    4. Marta Khomyn, 2020. "Essays on Modern Market Structure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2020.
    5. Yoonsik Hong & Yanghoon Kim & Jeonghun Kim & Yongmin Choi, 2022. "Index Tracking via Learning to Predict Market Sensitivities," Papers 2209.00780, arXiv.org, revised Dec 2022.
    6. Santhosh Ramalingegowda & Steven Utke & Yong Yu, 2021. "Common Institutional Ownership and Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 208-241, March.
    7. Baig, Ahmed & DeLisle, R. Jared & Zaynutdinova, Gulnara R., 2022. "Index mutual fund ownership and financial reporting quality," Research in International Business and Finance, Elsevier, vol. 62(C).
    8. Andrea Pawliczek & A. Nicole Skinner & Laura A. Wellman, 2021. "A new take on voice: the influence of BlackRock’s ‘Dear CEO’ letters," Review of Accounting Studies, Springer, vol. 26(3), pages 1088-1136, September.
    9. Benjamin Bennett & René M. Stulz & Zexi Wang, 2020. "Does Joining the S&P 500 Index Hurt Firms?," NBER Working Papers 27593, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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