Disengaged Owners and Financial Reporting: Evidence from Index Funds

47 Pages Posted: 3 Oct 2019

See all articles by Caleb Rawson

Caleb Rawson

University of Arkansas - Department of Accounting

Stephen P. Rowe

University of Arkansas

Date Written: August 28, 2019

Abstract

The amount of equity held by index funds is an increasingly important share of the U.S. stock market. This rise in ownership by passive investors that are, by construction, restricted from making trading decisions has the potential to dramatically impact firm decisions. We expect that compared to other owners, index funds have lower levels of engagement with portfolio firms, leading firm managers to make systematically different decisions as the percent of firm owners who are “disengaged” increases. Using fund-level stock holdings, we directly measure index fund ownership for each firm and examine its association with financial reporting. Consistent with lower engagement with financial reporting, we find that greater ownership by index funds is associated with fewer accruals, greater frequency of missing earnings expectations, and a greater likelihood of misstatements. Our findings are consistent with index funds engaging with firms less, leading to decreased managerial incentives to both bias earnings information and invest in financial reporting quality.

Keywords: Financial Reporting, Passive Investing, Index Funds, Misstatements

JEL Classification: G10, M10, M41

Suggested Citation

Rawson, Caleb and Rowe, Stephen P., Disengaged Owners and Financial Reporting: Evidence from Index Funds (August 28, 2019). Available at SSRN: https://ssrn.com/abstract=3459513 or http://dx.doi.org/10.2139/ssrn.3459513

Caleb Rawson (Contact Author)

University of Arkansas - Department of Accounting ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Stephen P. Rowe

University of Arkansas ( email )

Business Bldg. 450
Fayetteville, AR 72701
United States

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