Investing while lending: Do index funds improve managerial information disclosure?

Abstract

Securities lending activities have become pervasive among index funds in recent decades, yet its impact on information disclosure remains unclear. In this paper, we jointly investigate the information disclosure impact of both investing and lending activities of index funds, using a sample of the U.S. firms for 2002–2017. On the one hand, we document that securities lending deteriorates the information environment of public firms. On the other, index fund holdings are associated with greater information transparency and less bad news hoarding by firm managers, after controlling for the opposing effects from securities lending. This finding survives a battery of robustness tests and is more pronounced in a small sample using the Russell 1000/2000 index reconstitution as a source of plausibly exogenous variation in index fund holdings. We also document a negative association between index ownership and abnormal trading activities around stock price crash weeks. Our findings support the view that regardless of their pervasive securities lending engagement and passive investing strategies, index funds impose an overall favourable impact on information environment of public firms.