Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy

Lucian Bebchuk () and Scott Hirst

No 26543, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We seek to contribute to understanding index fund stewardship by providing a comprehensive theoretical, empirical, and policy analysis of such stewardship. We put forward an agency-cost theory of the stewardship decisions that index fund managers make. Our agency-costs analysis shows that index fund managers have strong incentives to (i) underinvest in stewardship and (ii) defer excessively to the preferences and positions of corporate managers. We also undertake an empirical analysis of the full range of stewardship activities that index funds do and do not undertake. We show that the body of evidence is, on the whole, consistent with the incentive issues identified by our agency-costs framework. Finally, we explain how our analysis should reorient important ongoing debates regarding common ownership and hedge fund activism.

JEL-codes: G23 G34 K22 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-fmk and nep-law
Note: CF LE
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Citations: View citations in EconPapers (33)

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