I investigate the role of ties between non-index and index funds within the same mutual fund family in shaping the monitoring of firms held by both funds. Theoretically, I show that non-index funds have more incentives to monitor and purchase additional shares of a firm when they have family ties with an index fund that holds the same firm. This can be explained by the family’s opportunity to leverage its profits through the index fund’s stake in the firm. Empirically, using exogenous variation in family ties, I show that non-index funds purchase more shares of a firm when an index fund in the family also holds that firm. 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.

Do index funds' family ties benefit the firms they own?

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