I investigate the impact of ties between index and non-index funds within the same mutual fund family on the value of firms in which both funds invest. Theoretically, I show that family ties increase non-index funds’ incentives to purchase additional shares and monitor a firm. This is because non-index funds are more likely to be able to influence management when index funds in the same family hold the same firm. Empirically, using exogenous variation in family ties following a firm’s addition to an index, I show that family ties are associated with higher non-index fund ownership. Furthermore, firms held by funds with family ties are more profitable and have higher valuations. The effect of family ties on valuation is larger for “dedicated” fund-firm relations and for firms in highly innovative industries, for which the potential gains from monitoring are the highest ex-ante.

institutional investors, index funds, governance, firm value
Pension Funds; Other Private Financial Institutions (jel G23), Financing Policy; Capital and Ownership Structure (jel G32)
Rotterdam School of Management (RSM), Erasmus University

Albuquerque de Sousa, J.A. (2017). Do Index Funds' Family Ties Benefit the Firms They Own?. Retrieved from http://hdl.handle.net/1765/105356