Do Index Funds Monitor?
62 Pages Posted: 29 Oct 2018 Last revised: 29 Apr 2020
Date Written: February 28, 2020
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 results 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: Suggested Citation