Do Index Funds Monitor? Revisited

Abstract

This paper reassesses index investing’s impact on corporate governance. After correcting several flaws in the Heath, Macciocchi, Michaely, and Ringgenberg (2022) empirical specification, we find different results. Our analysis reconciles conflicting findings in the literature and casts doubt on the claim that index funds do not monitor companies and that their growth harms firm performance. We also discuss why that paper’s other findings cannot be interpreted as evidence that indexers do not monitor. Finally, we provide guidance for future researchers by showing why difference-in-differences specifications can differ from instrumental variable estimations when using Russell index switches for identification.