The rise of passive investing raises the question of whether passive funds monitor management as effectively as active funds. Gormley and Kim (2026) argue that Heath et al. (2022)'s methodology for answering this question is biased and propose four changes. Three are econometrically invalid. Two share a flaw with Appel, Gormley, and Keim (2016, 2019): they condition on ex-post information about how firms respond to treatment—one selects the sample on post-treatment index assignments, the other controls for post-treatment market capitalization. The third imposes an unsupported symmetry restriction. The fourth, already proposed by Wei and Young (2025), does not change the conclusions. Even after adopting all four, their governance estimates largely agree with Heath et al. (2022) and contradict Appel et al. (2016). Furthermore, their headline claim that passive ownership has not displaced active ownership is contradicted by third-party data showing near one-for-one displacement; thus, either their specification is biased, or it cannot identify the governance effects of passive ownership.

This article shows that exchange-traded funds (ETFs) "sample" their indexes, systematically underweighting or omitting illiquid index stocks. As a result, arbitrage activity between the ETF and its index has heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs reduces liquidity and price efficiency and increases volatility and co-movement for liquid stocks but has no effect on illiquid stocks. Our results demonstrate that the effects of passive investing on asset markets depend on how passive funds replicate their target index.

ABSTRACT In statistics, samples are drawn from a population in a data‐generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence‐generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer‐review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.

After a natural experiment is first used, other researchers often reuse the setting, examining different outcome variables. We use simulations based on real data to illustrate the multiple hypothesis testing problem that arises when researchers reuse natural experiments. We then provide guidance for future inference based on popular empirical settings including difference-in-differences regressions, instrumental variables regressions, and regression discontinuity designs. When we apply our guidance to two extensively studied natural experiments, business combination laws and the Regulation SHO pilot, we find that many results that were statistically significant using single hypothesis testing do not survive corrections for multiple hypothesis testing.

Using micro-level data, we examine the behavior of socially responsible investment (SRI) funds. SRI funds select firms with lower pollution, more board diversity, higher employee satisfaction, and better workplace safety. Yet, both in the cross-section and using an exogenous shock to SRI capital, we find that SRI funds do not significantly change firm behavior. Moreover, we find little evidence that they try to impact firm behavior using shareholder proposals. Our results suggest that SRI funds are not greenwashing, but they are impact washing; they invest in a portfolio of firms with better environmental and social conduct but do not follow through on their promise of impact.

The relationship between profitability and leverage is controversial in the capital structure literature. We revisit this relation in light of a novel quasi-natural experiment that increases market power for a subset of firms. We find that treated firms increase their profitability throughout the treatment period. However, they only transiently reduce financial leverage, gradually reverting to their preshock level. Firms respond differently according to size with large firms gradually adjusting their leverage toward a new target and small firms reducing it. The patterns are broadly consistent with dynamic trade-off models with both fixed and variable adjustment costs. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.4235 .

Passively managed index funds now hold over 30$\%$ of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.

Exchange traded funds (ETFs) that track a specified index are a financial technology that has risen dramatically in the last two decades. We model an ETF's optimal index replication strategy and show that it involves underweighting or omitting illiquid index assets. Instrumenting for ETF trading activity, we find that documented effects of ETFs on asset markets differ or even flip sign depending on an asset's preexisting liquidity. These effects are stronger for ETFs that explicitly sample their underlying index. The results show that the effects of ETFs on underlying asset markets are determined by their index replication strategy.

A primary concern in mergers and acquisitions is the risk that the deal may be cancelled before completion. We document that this “interim risk” varies asymmetrically with the aggregate stock market: When the market falls sharply, cash deals are more than twice as likely to be cancelled. For stock deals and for cash deals with a definitive agreement in place there is no effect, consistent with costly renegotiation as a mechanism. Interim risk also alters the terms of merger deals that are announced and completed.

This Online Appendix provides additional empirical evidence to supplement the analysesprovided in the published text of "Do Index Funds Monitor?"

This Online Appendix provides additional empirical evidence to supplement the analyses provided in the published text of Do Index Funds Monitor?

We study the effects of trademark protection on firms’ profits and strategy using the 1996 Federal Trademark Dilution Act, which granted additional legal protection to selected trademarks. We find that the FTDA raised treated firms’ operating profits and was followed by a spike in trademark lawsuits and lower entry and exit in affected product markets. Treated firms reduced R&D spending, produced fewer patents and new products, and recalled a higher number of unsafe products. Our results suggest that stronger trademark protection negatively affected innovation and product quality. (JEL D22, K2, L43, O31, O34, O38) Authors have furnished code/data and an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.

Passively tracking an index involves tradeoffs, the most basic of which is to minimize tracking error while controlling transaction costs. This paper shows that exchange-traded funds (ETFs) systematically underweight or omit illiquid index assets. As a result, ETFs have heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs harms liquidity and price efficiency and increases volatility and co-movement for liquid assets, but has no effect on illiquid assets. Our results show that the effects of passive investing on asset markets depend on how passive intermediaries replicate their target index.

We examine whether the recent shift from active to passive investing leads to increased agency conflicts. Using a new research design that generates exogenous variation in fund holdings, we find that passive funds are weak monitors. Unlike active funds, passive funds rarely vote against firm management on contentious corporate governance issues. Moreover, although passive funds do exit 16% of their holdings each year, they do not use exit to enforce good governance. Finally, we find no evidence that passive funds engage with firm management. Our results show the rise of passive investing is shifting control from investors to corporate managers.

The single-firm event studies that securities litigants use to detect the impact of a corrective disclosure on a firm's stock price have low statistical power. As a result, observed price impacts are biased against defendants and systematically overestimate the effect on firm value. We use the empirical distribution of daily stock returns to analyze the bias and develop bias-corrected estimators of price impact in securities litigation. Because of low statistical power, the ex ante incentives against committing securities fraud are also too low. We analyze the adjustment for optimal deterrence and find that it is material, but is nowhere equal to the opposing truncation bias.

Passively managed index funds now own more than 25% of U.S. mutual fund and ETF assets. Using a new research design based on index reconstitutions, we study the governance implications of passive investing by directly examining the voice and exit mechanisms. We find that index funds are more likely to vote with a firm’s management. Moreover, while they do regularly exit positions and omit holdings in their target benchmark, they do not use the exit mechanism to enforce good governance. Our results show that passive investing shifts power from investors to firm managers.

This paper documents new evidence against perfect risk spanning in crude oil futures, and develops an affine futures pricing model that allows for unspanned macroeconomic factors. Compared to previous estimates, the oil spot premium is more volatile and strongly procyclical, which suggests that previous models miss the majority of variation in oil risk premiums. The estimates reveal a dynamic two-way relationship between oil futures and economic activity: productivity shocks are associated with higher oil prices, while oil price shocks affect economic activity by lowering future consumption spending. Unspanned macro factors also affect the valuation of real options.

We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An exogenous increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. These findings are consistent with an equilibrium in which investors choose to gather private information whenever it is profitable. As index investing increases, there are fewer privately-informed active investors (so overall information production drops), but the mix of investors adjusts until the returns to active investing are unchanged. As a result, passive investing does not undermine price efficiency.

The relationship between profitability and leverage has been controversial in the capital structure literature. We revisit this relation in light of a novel quasi-natural experiment that increases market power for a subset of firms. We find that treated firms increase their profitability throughout the treatment period. However, they only transiently reduce financial leverage, gradually reverting to their pre-shock level. Firms respond differently according to size, with large firms gradually adjusting their leverage towards a new target and small firms reducing it. The patterns are broadly consistent with dynamic trade-off models with both fixed and variable adjustment costs.