Why Passive Investors Care About Audit Quality

In recent decades, the rise of index funds (or passive investors), has caused heated debates over the efficacy of their stewardship role in corporate governance. Passive owners cannot influence the governance of a firm by selling its stock because the index composition determines whether the stock is in the fund. This  may increase passive investors’s incentives to monitor, vote  with their shares, and engage behind the scenes with companies. On the other hand, some scholars and commentators have questioned whether index funds deliver on their promises because stewardship seems too expensive for low-cost, low-overhead index funds.

In a recent study, … Read more