Finance Series
Do Index Funds Monitor? Revisited
Working Paper Author/Authors
Washington University in St. Louis
Hwanki Brian Kim
Baylor University
Key Finding
This paper challenges prior claims that index funds weaken governance, showing instead that corrected analyses reveal no harm to firm performance and highlight how index ownership shifts occur among institutional investors.
Abstract
This paper reassesses index investing’s impact on corporate governance. After correcting several empirical flaws in the influential Heath, Macciocchi, Michaely, and Ringgenberg (2022) paper, we find different results. Corrected findings fail to support the claim that index funds do not monitor companies or that their growth harms firm performance. Moreover, we show that index fund ownership displaces ownership by institutions with fewer assets and institutions where the stock represents a smaller share of their assets. Finally, we provide guidance for future researchers by showing why alternative specifications can yield differing estimates when using index assignments or switches for identification.
