The power of not trading: Evidence from index fund ownership

Caleb Rawson () and Stephen P. Rowe ()
Additional contact information
Caleb Rawson: University of Arkansas
Stephen P. Rowe: University of Arkansas

Review of Accounting Studies, 2024, vol. 29, issue 1, No 11, 388-422

Abstract: Abstract Index funds are an increasingly important part of the U.S. stock market, with the average S&P 1500 firm having more than 20% of its equity held by index funds in 2018. Compared to other owners, index fund managers face greater constraints and limitations when selecting portfolio investments and making trading decisions about whether, and when, to enter or exit a position. Using hand-collected data to examine the ramifications of increased ownership by constrained index funds, we find that greater index fund ownership is associated with less bias (greater frequency of missing earnings and fewer abnormal accruals) and less obfuscation (more readable, more negative, and more specific disclosures) in financial reporting. Additional analysis finds results consistent with this effect being due to index funds wielding power through lower trading and not higher oversight. Finally, we document several important conceptual and empirical factors to consider when examining index fund ownership, compared to institutional-level holdings or changes in index constituents.

Keywords: Institutional Investors; Index Funds; Passive Investing; Financial Reporting; G10; M10; M41 (search for similar items in EconPapers)
Date: 2024
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-022-09726-9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09726-9

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-022-09726-9

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().