Abstract: We address a methodological flaw in the influential Heath, Macciocchi, Michaely, and Ringgenberg (2022) paper. Corrected findings reveal that index inclusion and the resulting index ownership shifts do not affect a stock’s level of active fund ownership. Instead, index funds displace institutional owners with fewer assets and for which the stock represents a smaller portion of their assets. Additionally, there is no evidence that index funds monitor companies less than the owners they displace or that their growth negatively impacts firm performance and managerial incentives. These findings suggest that the impact of index investing is less concerning than earlier research indicated.
Discussant: Travis Johnson, University of Texas-Austin
Abstract: Using a unique dataset of performance-fee mutual funds, we quantify incentives from relative performance evaluation (RPE) and their behavioral implications. We measure direct (short-term) incentives by the option delta embedded in performance fees and indirect (long-term) incentives via the value of future fees. RPE funds face stronger short-term and similar or weaker long-term incentives, yielding a more short-term compensation profile. Incentive sensitivity rises with benchmark risk, consistent with models of optimal contracting under learning. While stronger direct incentives increase active risk, long-horizon incentives attenuate this effect. However, performance effects are modest, and managerial skill is reflected mainly in base pay.
Discussant: Hong Yan, Shanghai Jiao Tong University
Abhinav Gupta, University of North Carolina-Chapel Hill
Sabrina Howell, New York University
Kyle Zimmerschied, University of Missouri
Abstract: Do private equity (PE) returns rise or fall with fund scale? A causal effect is difficult to identify because better managers can raise larger funds. We develop an instrument using donations to universities. Donations affect fund size because endowments are sensitive to donation income, have sticky relationships with PE managers, and signal fund quality to other Limited Partner investors. We show decreasing returns to scale: a 1\% size increase in fund size reduces net IRR by 0.1 percentage points. Larger funds do larger deals, which underperform. We find no change in risk, in part because additional deals are more levered.
Discussant: Ayako Yasuda, University of California-Davis
