Do Index Funds Monitor?. (23rd February 2021)

• Record Type: Journal Article
• Authors: Heath, Davidson; Macciocchi, Daniele; Michaely, Roni; Ringgenberg, Matthew C
• Editors: Mueller, Holger
• Is Part Of: Review of financial studies. Volume 35:Number 1(2022)
• Page Start: 91
• Page End: 131
• Publication Date: 2021-02-23
• Subjects: G12 -- G14; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhab023
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: Passively managed index funds now hold over 30$\%$ of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.