Long-term index fund ownership and stock returns

• Main Authors: BOEHMER, Ekkehart, SONG, Wanshan, TIWARI, Ashish, ZHANG, Zhe
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6214; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7213/viewcontent/Long_term_Index_Fund_Ownership_and_Stock_Returns__19.pdf
• Institution: Singapore Management University

We examine the implications of stock ownership by index funds for shareholder value. Consistent with recent findings that stock ownership by passive funds contributes to improved governance, we document a strong positive relation between the duration of passive fund holdings and subsequent stock performance. This positive relation is more pronounced for firms with recent poor performance, and for smaller firms and firms with higher allocation weights in passive funds’ portfolios. Our results support the view that index funds, although passive in their investment decisions, successfully contribute to long-term value creation by actively engaging with firms on matters of governance.