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Do Index Funds Monitor?

Large shareholder activism, risk sharing, and financial market equilibrium

Davidson Heath (), Daniele Macciocchi, Roni Michaely () and Matthew Ringgenberg

Review of Financial Studies, 2022, vol. 35, issue 1, 91-131

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.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
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