Do Index Funds' Family Ties Benefit the Firms They Own?
63 Pages Posted: 25 Oct 2017 Last revised: 15 Nov 2017
Date Written: November 2017
I investigate the impact of ties between index and non-index funds within the same mutual fund family on the value of firms in which both funds invest. Theoretically, I show that family ties increase non-index funds’ incentives to purchase additional shares and monitor a firm. This is because non-index funds are more likely to be able to influence management when index funds in the same family hold the same firm. Empirically, using exogenous variation in family ties following a firm’s addition to an index, I show that family ties are associated with higher non-index fund ownership. Furthermore, firms held by funds with family ties are more profitable and have higher valuations. The effect of family ties on valuation is larger for “dedicated” fund-firm relations and for firms in highly innovative industries, for which the potential gains from monitoring are the highest ex-ante.
Keywords: institutional investors, index funds, governance, firm value
JEL Classification: G23, G32
Suggested Citation: Suggested Citation