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
We address a methodological flaw in the influential Heath, Macciocchi, Michaely, and Ringgenberg (2022) paper. Corrected findings reveal that index inclusion and the resulting index ownership shifts do not affect a stock’s level of active fund ownership. Instead, index funds displace institutional owners with fewer assets and for which the stock represents a smaller portion of their assets. Additionally, there is no evidence that index funds monitor companies less than the owners they displace or that their growth negatively impacts firm performance and managerial incentives. These findings suggest that the impact of index investing is less concerning than earlier research indicated.
