VGSF Finance Research Seminar
We examine whether passively managed index funds monitor their portfolio companies using a new research design that generates exogenous variation in fund holdings. We find index funds are weak monitors. Unlike active funds, index funds:
(i) usually vote with firm management;
(ii) do not use exit to enforce good governance, although they do sell 16% of holdings each year;
(iii) rarely file a Schedule 13D, indicating they do not intend to affect firm policies.
Moreover, the agenda items that index funds support reduce firm value. Our results show that index investing hurts shareholders by shifting control from investors to managers.
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