Passive Aggressive: How Index Funds Vote on Corporate Governance Proposals
63 Pages Posted: 13 Nov 2019 Last revised: 8 Dec 2019
Date Written: November 15, 2019
I study how index funds affect corporate governance through their votes in proxy meetings. The data includes all mutual fund votes on 159,262 proposals at 6,260 firms over the period 2005–2016. I measure the value created by a proposal using a Regression Discontinuity Design on the market reaction to a narrow vote outcome, and I derive four main results. First, the market reaction to a proposal’s passage (resp. failure) is stronger if a larger proportion of index funds vote to support (resp. oppose) it. Second index funds optimally allocate limited monitoring resources to votes for which they are pivotal. Third, index fund ownership of a company’s stock (as instrumented using the Russell 1000/2000 cutoff) promotes the adoption of value-creating proposals. Fourth, managers of firms with higher index fund ownership present fewer value-reducing proposals. Overall, my results imply that index fund ownership improves corporate governance of portfolio firms by making value-creating proposals, and their passage, more likely.
Keywords: index funds, passive investing, mutual funds, proxy meetings, corporate governance, proxy votes, limited attention
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