Do Index Funds Monitor?

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

doi:10.1093/rfs/hhab023

Cited by 126 publications

(39 citation statements)

References 51 publications

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“…In fact, large passive funds tend to exhibit a more "disciplinarian" attitude toward management (Bolton, Li, Ravina, and Rosenthal (2019))-and institutional common owners not only internalize governance externalities but also are more likely to vote against management (He, Huang, and Zhao (2019)). 10 There are, however, countervailing agency problems: Bebchuk and Hirst (2019) pointed out that index fund managers may not have incentives to monitor management (for evidence that index funds are less likely to vote against management than are active funds, see Brav, Jiang, Li, Pinnington (2019), Heath, Macciocchi, Michaely, andRinggenberg (2019)). Schmidt and Fahlenbrach (2017) showed that increased passive ownership impedes high-cost governance activities and increases 8 See Vives (2020) for an exposition of (a) the tension between market power and efficiency as an outcome of common ownership and (b) a parallel with debates in the 1960s and 1970s over the "structure-conductperformance" paradigm in the field of industrial organization.…”

Section: Empiricsmentioning

confidence: 99%

General Equilibrium Oligopoly and Ownership Structure

Azar

Vives

2021

ECTA

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We develop a tractable general equilibrium framework in which firms are large and have market power with respect to both products and labor, and in which a firm's decisions are affected by its ownership structure. We characterize the Cournot–Walras equilibrium of an economy where each firm maximizes a share‐weighted average of shareholder utilities—rendering the equilibrium independent of price normalization. In a one‐sector economy, if returns to scale are non‐increasing, then an increase in “effective” market concentration (which accounts for common ownership) leads to declines in employment, real wages, and the labor share. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership could stimulate the economy when the elasticity of labor supply is high relative to the elasticity of substitution in product markets. We characterize for which ownership structures the monopolistically competitive limit or an oligopolistic one is attained as the number of sectors in the economy increases. When firms have heterogeneous constant returns to scale technologies, we find that an increase in common ownership leads to markets that are more concentrated.

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Section: Empiricsmentioning

confidence: 99%

General Equilibrium Oligopoly and Ownership Structure

Azar

Vives

2021

ECTA

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“…Index funds seek to match the returns of a published index, so they have limited investment trading choices, potentially making engagement through avenues like voting a more meaningful way to influence a portfolio firm. Prior research provides mixed evidence on whether index funds act as monitors on governance issues (e.g., Appel et al 2016;Heath et al 2022). However, index ESG funds may be more likely to monitor firms on ES issues because they have publicly acknowledged their commitment to these issues through their investment criteria in the prospectus filed with the SEC.…”

Section: Securities and Exchange Commission 2021)mentioning

confidence: 99%

Walk the talk: ESG mutual fund voting on shareholder proposals

et al. 2022

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We document that U.S. mutual funds with investment objectives designated as “Sustainable Investment Overall” by Morningstar (ESG funds) are more likely than other mutual funds to vote in support of environmental and social (ES) shareholder proposals and governance (G) shareholder proposals. We also find that the higher support for ES proposals by ESG funds relative to other funds is more pronounced in index funds than in active funds, consistent with trading constraints influencing voting behavior. While these results provide evidence that ESG funds “walk the talk” with their voting behavior on average, we find that fund families play a significant role in that walk. Additionally, in an analysis of fund families that are signatories of the United Nations Principles for Responsible Investment (PRI), we find that ESG funds of PRI families are significantly more likely to support ES proposals and G proposals than non-ESG funds of PRI families. We determine that this significant difference stems from non-ESG funds of PRI families providing less support than non-ESG funds from non-PRI families. Taken together, these results provide evidence that ESG funds available to U.S. investors provide more support for shareholder proposals aligned with their designated investment objective, but the type and family of the fund influence that support.

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“…On the other hand, diversified shareholders may suffer from a hold-up problem: the benefits from monitoring are shared by all owners, but the costs are not, so there is a disincentive to engage. Additionally, institutional owners with primarily passive funds may charge lower fees for these funds, limiting the resources they have available for costly monitoring and engagement activities (Bebchuk et al 2017); this, too, may lead to less effective monitoring (Heath et al 2019).…”

Section: Prior Researchmentioning

confidence: 99%

A new take on voice: the influence of BlackRock’s ‘Dear CEO’ letters

2021

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We examine whether broad-based public engagement by institutional investors influences the behavior of portfolio firms. We investigate this question in the context of BlackRock’s annual Dear CEO letter, which in recent years has called for portfolio firms to acknowledge and quantify the impact of environmental and regulatory factors on their firms. We find that portfolio firms’ disclosures during the post-letter period reflect topics similar to those discussed in the letters, controlling for a variety of firm and disclosure characteristics and the occurrence of private engagements. Moreover, BlackRock appears to value these additional disclosures, as it more often votes with management on shareholder proposals during subsequent annual shareholder meetings. Finally, motivated by BlackRock’s attempts to mobilize firms toward its specific policy recommendations, we also provide some evidence that firms’ lobbying efforts during the post-letter period become more aligned with the issues highlighted in the letter, especially when firms’ share BlackRock’s policy preferences ex ante. Taken together, our evidence suggests that portfolio firms are responsive to BlackRock’s public engagement efforts.

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Do Index Funds Monitor?

Cited by 126 publications

References 51 publications

General Equilibrium Oligopoly and Ownership Structure

General Equilibrium Oligopoly and Ownership Structure

Walk the talk: ESG mutual fund voting on shareholder proposals

A new take on voice: the influence of BlackRock’s ‘Dear CEO’ letters

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