Passive Investors are Passive Monitors

58 Pages Posted: 29 Oct 2018 Last revised: 8 Jan 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)

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: December 28, 2018

Abstract

Passively managed index funds now own more than 25% of U.S. mutual fund and ETF assets. Using a new research design based on index reconstitutions, we study the governance implications of passive investing by directly examining the voice and exit mechanisms. We find that index funds are more likely to vote with a firm's management. Moreover, while they do regularly exit positions and omit holdings in their target benchmark, they do not use the exit mechanism to enforce good governance. Our results show that passive investing shifts power from investors to firm 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., Passive Investors are Passive Monitors (December 28, 2018). 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

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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