Do Index Funds Monitor?

77 Pages Posted: 29 Oct 2018 Last revised: 8 May 2019

See all articles by Davidson Heath

Davidson Heath

University of Utah David Eccles School of Business

Daniele Macciocchi

University of Utah - David Eccles School of Business

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: April 23, 2019

Abstract

We examine whether the rise of index investing leads to increased agency conflicts. Using a new research design that generates exogenous variation in fund holdings, we find that index funds are weak monitors. Unlike active funds, index funds rarely vote against firm management on corporate governance issues. Moreover, although index funds do exit 16% of their holdings each year, they do not use exit to enforce good governance. They also rarely file a Schedule 13D, indicating they do not intend to affect firm policies. Our results show the rise of index investing is shifting control from investors to corporate managers.

Keywords: governance, index investing, monitoring, passive investing, voting, exit

JEL Classification: G12, G14

Suggested Citation

Heath, Davidson and Macciocchi, Daniele and Michaely, Roni and Ringgenberg, Matthew C., Do Index Funds Monitor? (April 23, 2019). Swiss Finance Institute Research Paper No. 19-08. Available at SSRN: https://ssrn.com/abstract=3259433 or http://dx.doi.org/10.2139/ssrn.3259433

Davidson Heath (Contact Author)

University of Utah David Eccles School of Business ( email )

Salt Lake City, UT 84112
United States

Daniele Macciocchi

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Matthew C. Ringgenberg

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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