Passive Investors are Passive Monitors
60 Pages Posted: 29 Oct 2018 Last revised: 13 Mar 2019
Date Written: December 28, 2018
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: Suggested Citation