Quasi-Indexer Ownership and Conditional Conservatism: Evidence from Russell Index Reconstitutions *

Abstract

While quasi-indexer institutional investors have been traditionally viewed as passive owners, recent literature finds they play an important governance role as external monitors. We test the causal effect of quasi-indexer ownership on conditional conservatism using the plausibly exogenous discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using both regression discontinuity and instrumental variable research designs, we find higher ownership by quasi-indexers results in higher levels of conditional conservatism. Our results are robust to various model specifications and using an index switching analysis. We also find the effect of quasi-indexer ownership on conservatism is stronger when the expected benefits (costs) of conservatism are greater (lower) and in the presence of activist shareholders. Our evidence provides new insights into the role of quasi-indexers as external monitors and how they affect firms' financial reporting quality.

Keywords: JEL Classification: G23, G34, D82 quasi-indexer institutional owners, conditional conservatism, active monitors, causal effect, regression discontinuity