Heaton on Fisch, Hamdani, and Davidoff Solomon on Passively Managed Funds

J.B. Heaton (University of Chicago Law School) has posted All You Need is Passive A Response to Professors Fisch, Hamdani, and Davidoff Solomon on SSRN.  Here is the abstract: In a recent paper, Professors Jill Fisch, Assaf Hamdani, and Steven Davidoff Solomon argue that passively-managed funds have incentives to engage meaningfully with their portfolio companies because they compete for investors with actively-managed funds. Since passively-managed funds that track indices cannot trade out of the index, Professors Fisch, Hamdani, and Davidoff Solomon argue that passive funds will engage with portfolio companies to increase the companies' stock return performance. In this short response, I highlight four problems with their argument. First, their argument is premised on the assumption that active managers have a comparative advantage over passive funds – the ability to trade in and out of stocks – that passive funds must address, but the empirical evidence -…

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