Working Paper: NBER ID: w26543
Authors: Lucian A. Bebchuk; Scott Hirst
Abstract: We seek to contribute to understanding index fund stewardship by providing a comprehensive theoretical, empirical, and policy analysis of such stewardship. We put forward an agency-cost theory of the stewardship decisions that index fund managers make. Our agency-costs analysis shows that index fund managers have strong incentives to (i) underinvest in stewardship and (ii) defer excessively to the preferences and positions of corporate managers. We also undertake an empirical analysis of the full range of stewardship activities that index funds do and do not undertake. We show that the body of evidence is, on the whole, consistent with the incentive issues identified by our agency-costs framework. Finally, we explain how our analysis should reorient important ongoing debates regarding common ownership and hedge fund activism.
Keywords: Index Funds; Corporate Governance; Stewardship
JEL Codes: G23; G34; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| index fund managers' compensation structure (M12) | underinvestment in stewardship (G31) |
| underinvestment in stewardship (G31) | misalignment of benefits from stewardship (G35) |
| misalignment of benefits from stewardship (G35) | reduced incentives for index fund managers (G23) |
| excessive deference to corporate managers (G34) | conflicts of interest (G34) |
| fears of backlash from corporate managers (G34) | excessive deference to corporate managers (G34) |
| agency issues (G24) | governance and performance of public companies (G38) |