Do Index Funds' Family Ties Benefit the Firms They Own?

63 Pages Posted: 25 Oct 2017 Last revised: 15 Nov 2017

See all articles by Jose Alexandre Albuquerque de Sousa

Jose Alexandre Albuquerque de Sousa

Norwegian School of Economics (NHH); Erasmus Research Institute of Management (ERIM); Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM)

Date Written: November 2017

Abstract

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

Albuquerque de Sousa, Jose Alexandre, Do Index Funds' Family Ties Benefit the Firms They Own? (November 2017). Available at SSRN: https://ssrn.com/abstract=3059128 or http://dx.doi.org/10.2139/ssrn.3059128

Jose Alexandre Albuquerque de Sousa (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

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