Do Index Funds Monitor?

57 Pages Posted: 29 Oct 2018

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: January 20, 2020

Abstract

Passively managed index funds now hold over 25% of U.S. mutual fund and ETF assets. The rise of index investing raises fundamental questions about monitoring and corporate governance. We show that, relative to active funds, index funds are less likely to vote against firm management on contentious corporate governance issues. Across a variety of tests, we also find no evidence that index funds engage with firm management to improve governance. Moreover, higher index fund ownership leads to less independent boards and worse corporate governance. Our result show the rise of index investing is shifting control from investors to firm managers.

Keywords: Corporate Governance, Index Funds, Monitoring, Passive Investing, Voting

JEL Classification: G12, G14

Suggested Citation

Heath, Davidson and Macciocchi, Daniele and Michaely, Roni and Ringgenberg, Matthew C., Do Index Funds Monitor? (January 20, 2020). Swiss Finance Institute Research Paper No. 19-08; European Corporate Governance Institute – Finance Working Paper No. 638/2019. 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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