Do Index Funds Monitor?

75 Pages Posted: 29 Oct 2018 Last revised: 8 Aug 2021

See all articles by Davidson Heath

Davidson Heath

University of Utah - David Eccles School of Business

Daniele Macciocchi

University of Miami Herbert Business School

Roni Michaely

The University of Hong Kong; ECGI

Matthew C. Ringgenberg

University of Utah - Department of Finance

Date Written: November 4, 2020

Abstract

Passively managed index funds now hold over 30% of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.

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

JEL Classification: G12, G14

Suggested Citation

Heath, Davidson and Macciocchi, Daniele and Michaely, Roni and Ringgenberg, Matthew C., Do Index Funds Monitor? (November 4, 2020). Swiss Finance Institute Research Paper No. 19-08, European Corporate Governance Institute – Finance Working Paper No. 638/2019, Accepted, Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=3259433 or http://dx.doi.org/10.2139/ssrn.3259433

Davidson Heath

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

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

Daniele Macciocchi

University of Miami Herbert Business School ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States

Roni Michaely (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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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