Do Index Funds Monitor?
77 Pages Posted: 29 Oct 2018 Last revised: 8 May 2019
Date Written: April 23, 2019
We examine whether the rise of index investing leads to increased agency conflicts. Using a new research design that generates exogenous variation in fund holdings, we find that index funds are weak monitors. Unlike active funds, index funds rarely vote against firm management on corporate governance issues. Moreover, although index funds do exit 16% of their holdings each year, they do not use exit to enforce good governance. They also rarely file a Schedule 13D, indicating they do not intend to affect firm policies. Our results show the rise of index investing is shifting control from investors to corporate managers.
Keywords: governance, index investing, monitoring, passive investing, voting, exit
JEL Classification: G12, G14
Suggested Citation: Suggested Citation