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Do Index Funds Monitor?

Author

Listed:
  • Davidson Heath
  • Daniele Macciocchi
  • Roni Michaely
  • Matthew C Ringgenberg

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.

Suggested Citation

  • Davidson Heath & Daniele Macciocchi & Roni Michaely & Matthew C Ringgenberg, 2022. "Do Index Funds Monitor?," The Review of Financial Studies, Society for Financial Studies, vol. 35(1), pages 91-131.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:1:p:91-131.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab023
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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