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Do Index Funds Monitor?

Davidson Heath (), Daniele Macciocchi, Roni Michaely () and Matthew Ringgenberg
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Daniele Macciocchi: University of Utah - David Eccles School of Business

No 19-08, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We examine whether the rise of index investing leads to increased agency conflicts. Using a new research design that generates exogenous variation in fund holdings, we find that index funds are weak monitors. Unlike active funds, index funds rarely vote against firm management on corporate governance issues. Moreover, although index funds do exit 16% of their holdings each year, they do not use exit to enforce good governance. They also rarely file a Schedule 13D, indicating they do not intend to affect firm policies. Our results show the rise of index investing is shifting control from investors to corporate managers.

Keywords: governance; index investing; monitoring; passive investing; voting; exit (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2019-05
New Economics Papers: this item is included in nep-fmk
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