Quasi-Indexer Ownership and Conditional Conservatism: Evidence from Russell Index Reconstitutions

60 Pages Posted: 29 Oct 2018 Last revised: 6 Jun 2019

See all articles by Stephen A. Hillegeist

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Fernando Penalva

IESE Business School - University of Navarra

Liwei Weng

Arizona State University (ASU)

Date Written: May 31, 2019

Abstract

We examine the effects of quasi-indexer ownership on conditional conservatism using the plausibly exogenous discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using both regression discontinuity and instrumental variable research designs, we find higher quasi-indexer ownership leads to higher levels of conditional conservatism. We also find the magnitude of this conservatism effect is larger when the expected benefits of conservatism are greater and in the presence of activist shareholders. Importantly, we examine the mechanisms through which the conservatism effect occurs. We find the conservatism effect is completely explained by the influence quasi-indexer ownership has on CEOs’ equity-based incentives. Differences in quasi-indexer ownership around the threshold cause changes in CEO incentives, which in turn result in the firm choosing more conservative accounting policies. Our evidence provides new insights into the role of quasi-indexers as external monitors and to what extent they directly or indirectly influence firm policies.

Keywords: quasi-indexer institutional owners, conditional conservatism, monitoring, causal effect, regression discontinuity

JEL Classification: G23, G34

Suggested Citation

Hillegeist, Stephen A. and Penalva, Fernando and Weng, Liwei, Quasi-Indexer Ownership and Conditional Conservatism: Evidence from Russell Index Reconstitutions (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3262206 or http://dx.doi.org/10.2139/ssrn.3262206

Stephen A. Hillegeist (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

Fernando Penalva

IESE Business School - University of Navarra ( email )

Ave. Pearson 21
Barcelona, Barcelona 08034
Spain
932534200 (Phone)
932534343 (Fax)

HOME PAGE: http://www.iese.edu

Liwei Weng

Arizona State University (ASU) ( email )

Tempe, AZ
United States

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