The power of not trading: Evidence from index fund ownership
Review of Accounting Studies, forthcoming
52 Pages Posted: 3 Oct 2019 Last revised: 4 Nov 2022
Date Written: September 15, 2022
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: Suggested Citation