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The power of not trading: Evidence from index fund ownership

Author

Listed:
  • Caleb Rawson

    (University of Arkansas)

  • Stephen P. Rowe

    (University of Arkansas)

Abstract

Index funds are an increasingly important part of the U.S. stock market, with the average S&P 1500 firm having more than 20% of its equity held by index funds in 2018. Compared to other owners, index fund managers face greater constraints and limitations when selecting portfolio investments and making trading decisions about whether, and when, to enter or exit a position. Using hand-collected data to examine the ramifications of increased ownership by constrained index funds, we find that greater index fund ownership is associated with less bias (greater frequency of missing earnings and fewer abnormal accruals) and less obfuscation (more readable, more negative, and more specific disclosures) in financial reporting. Additional analysis finds results consistent with this effect being due to index funds wielding power through lower trading and not higher oversight. Finally, we document several important conceptual and empirical factors to consider when examining index fund ownership, compared to institutional-level holdings or changes in index constituents.

Suggested Citation

  • Caleb Rawson & Stephen P. Rowe, 2024. "The power of not trading: Evidence from index fund ownership," Review of Accounting Studies, Springer, vol. 29(1), pages 388-422, March.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09726-9
    DOI: 10.1007/s11142-022-09726-9
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