Incentive

Global assets under management

World Wide Web

Index fund

Statistics

Microeconomics

Portfolio

Accounting

Closed-end fund

Economics

Independence (probability theory)

Computer science

Open-end fund

Fund of funds

Market liquidity

Business

Corporate governance

Mathematics

Index (typography)

Political science

Passive management

Institutional investor

Finance

Equity (law)

Review of Financial Studies

Passively managed index funds now hold over 30$\%$ of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.

Do Index Funds Monitor?