The Power of Not Trading: Evidence from index fund ownership

52 Pages Posted: 3 Oct 2019 Last revised: 8 Jun 2022

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

Index funds are an increasingly important part of the U.S. stock market with the average S&P 1500 firm having more than 20% of their equity held by index funds in 2018. Compared to other owners, index fund managers face greater constraints and limitations when selecting portfolio investments and making trading decisions about whether, and when, to enter or exit a position. Using hand-collected data to examine the ramifications of increased ownership by constrained index funds, we find that greater index fund ownership is associated with less bias (greater frequency of missing earnings and fewer abnormal accruals) and less obfuscation (more readable, more negative, and more specific disclosures) in financial reporting. Additional analysis finds results consistent with this effect being due to index funds wielding power through lower trading and not higher oversight. Finally, we document several important conceptual and empirical factors to consider when examining index fund ownership compared to institutional-level holdings or changes in index constituents.

Keywords: Institutional Investors, Index Funds, Passive Investing, Financial Reporting

JEL Classification: G10, M10, M41

Suggested Citation

Rawson, Caleb and Rowe, Stephen P., The Power of Not Trading: Evidence from index fund ownership (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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