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Do Index Funds Monitor?

2021; Oxford University Press; Volume: 35; Issue: 1 Linguagem: Inglês

10.1093/rfs/hhab023

1465-7368

Davidson Heath, Daniele Macciocchi, Roni Michaely, Matthew C. Ringgenberg,

Banking stability, regulation, efficiency

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.