Index Fund Ownership and Financial Reporting Myopia
54 Pages Posted: 3 Oct 2019 Last revised: 13 Apr 2020
Date Written: August 28, 2019
Index funds are an increasingly important part of the U.S. stock market with the average S&P 1500 company having 22% of their equity held by index funds in 2018 (compared with 10% in 2011). Building on concurrent research finding that index funds engage less with portfolio firms than other investors, we expect firm-level index fund ownership to be associated with systematically different financial reporting decisions by firms. Using fund-level stock holdings, we examine the association between index fund ownership and financial reporting myopia. Consistent with less myopia, we find that greater index fund ownership is associated with a greater frequency of missing earnings, fewer abnormal accruals, and less obfuscation in financial reports (i.e., more readable, more negative, and more specific disclosures). Additional analyses provide results consistent with this effect being due to lower engagement by index funds and not higher oversight.
Keywords: Financial Reporting, Passive Investing, Index Funds
JEL Classification: G10, M10, M41
Suggested Citation: Suggested Citation