How disclosure impacts monitoring spillovers between competing passive and active funds

66 Pages Posted: 8 Jan 2021 Last revised: 30 Sep 2021

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Anderson School of Management

Lucas Mahieux

Tilburg University - Tilburg University School of Economics and Management

Date Written: September 30, 2021

Abstract

We examine how disclosure impacts monitoring spillovers between competing passive and active funds. In our model, funds use fees and monitoring capacities to compete with each other over fund flows from a set of heterogeneous risk-averse investors. We provide conditions for when passive and active fund monitoring are strategic complements, leading to monitoring of the same firms, or strategic substitutes, leading to monitoring of different firms. We then highlight several disclosure implications of our model. Disclosure of the active fund's holdings facilitates monitoring complementarities across funds, above and beyond disclosure providing information to investors and firms. Moreover, we show that better information about portfolio firms' cash flows may either increase or decrease monitoring. The net effect depends on whether the dominating effect of disclosure involves reducing the active fund's information advantage or a general reduction in uncertainty about firms' cash flows.

Keywords: Active funds; Passive funds; Competition; Corporate governance; Disclosure

JEL Classification: D4, G23, G34, K22, M41

Suggested Citation

Friedman, Henry L. and Mahieux, Lucas, How disclosure impacts monitoring spillovers between competing passive and active funds (September 30, 2021). Available at SSRN: https://ssrn.com/abstract=3730578 or http://dx.doi.org/10.2139/ssrn.3730578

Henry L. Friedman

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Lucas Mahieux (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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