Do Index Funds Monitor?

By D. Heath, D. Macciocchi, Roni Michaely, Matthew C. Ringgenberg. The Review of financial studies, 2021

123 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/98cd4298179ef39edb9b1102c4d7906f74788c8f

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In Accounting

1. Florian Ederer
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Citations in the corpus

• Common Ownership, Competition, and Top Management Incentives (2016, background): “Heath et al. (2020) document that index funds are ineffective monitors who are less likely to vote against firm management on contentious governance issues and do not act to improve corporate governance through their vote or engagement.”