Does Governance Travel Across Industries? A Mutual Fund Episode

Abstract

We examine whether better-managed mutual funds are at the same time good corporate monitors by exploiting small changes in market capitalizations of firms around the Russell 1000 and 2000 index cutoff. Tracking error concerns force active mutual funds to buy addition stocks moving into Russell 2000. Using a regression discontinuity design, we find that increases in ownership by better-managed mutual funds leads to better overall governance with more independent directors, fewer anti-takeover measures, and more equal voting rights. Firms' operating performance also improve. Our results provide evidence that management knowledge is transmittable across industries.

Keywords: Knowledge Transmission, Return Gap, Corporate Governance, Regression Discontinuity

JEL Classification: G30, G2