Do Index Funds Monitor?

Our paper, Do Index Funds Monitor? examines whether index funds monitor the firms in their portfolios and hold corporate managers accountable to the same extent that actively managed funds do. If a shareholder disagrees with firm management, she has three options. First, she can voice her opinion by voting against management proposals and in favor of shareholder proposals—including her own. Second, she can engage with firm management and convince them to change corporate policy. Third, she can sell her shares (the “Wall Street Walk”), which will express her lack of confidence in the firm’s future value, and possibly drive the share price down. We examine each of these three monitoring channels using comprehensive data on U.S. equity mutual funds from 2004 to 2017. We find that relative to active funds, index funds are weak monitors that cede power to firm management.

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