Do Index Funds Monitor? Revisited

49 Pages Posted: 13 Dec 2024 Last revised: 18 Jan 2025

See all articles by Todd A. Gormley

Todd A. Gormley

Washington University in St. Louis; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate

Date Written: October 27, 2024

Abstract

This paper reassesses index investing’s impact on corporate governance. After correcting several flaws in the Heath, Macciocchi, Michaely, and Ringgenberg (2022) empirical specification, we find different results. Our analysis reconciles conflicting findings in the literature and casts doubt on the claim that index funds do not monitor companies and that their growth harms firm performance. We also discuss why that paper’s other findings cannot be interpreted as evidence that indexers do not monitor. Finally, we provide guidance for future researchers by showing why difference-in-differences specifications can differ from instrumental variable estimations when using Russell index switches for identification.

Keywords: JEL category: G12, G14, G23, G30, G34 Corporate Governance, Index Investing, Monitoring, Voting

JEL Classification: G12, G14, G23, G30, G34

Suggested Citation

Gormley, Todd A. and Kim, Hwanki Brian, Do Index Funds Monitor? Revisited (October 27, 2024). Available at SSRN: https://ssrn.com/abstract=5004197 or http://dx.doi.org/10.2139/ssrn.5004197

Todd A. Gormley (Contact Author)

Washington University in St. Louis ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate ( email )

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Waco, TX 76798-8004
United States

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