Abstract: We develop a novel measure of disagreement in voice between active and passive mutual funds using their proxy votes that capture shareholder conflicts in public firms. We show that the disagreement in voice between passive and active funds is associated with a decrease in firm value and suggest that the firm value loss is due to conflicting incentives between the two groups. Our research contributes to the understanding of shareholder conflicts and emphasizes the importance of considering conflicting incentives within the shareholder landscape.
Abstract: This paper studies institutional investors’ decision-making using novel data from a major proxy advisor. We highlight the significant role of customized proxy advice in shaping shareholders’ voting decisions. About 80% of funds receive customized advice, and custom recommendations differ substantially from benchmark recommendations. We show that customization plays two key roles. First, it helps shareholders express their ideologies through the vote. Second, it facilitates shareholders’ decision-making process by reducing the need to pay attention to every proposal individually and enabling focus on the more important proposals. Customization thus influences both the aggregation of preferences and the aggregation of information in voting outcomes. Our findings offer a new perspective on the role of proxy advisors and suggest a shift away from solely focusing on benchmark recommendations.
Abstract: Smart money often trades actively during times of large corporate events. We document in the context of mergers and acquisitions (M&A) that, during the bid negotiation period, institutional investors increase their holdings of acquirers in deals that generate positive value and decrease their holdings in those that generate negative value. The resulting trading profits create a significant gap between the return to the acquiring firm and the return to these investors, and this gap renders firm return a misleading measure of investors’ incentives in pursuing mergers. On average, institutional investors earn 2.4% from M&A while the return to acquirers is only -0.9%. In deals that deliver volatile returns to acquiring firms, the gap increases to 6.3%. We further show how the trading motive impacts the ex-ante holdings of institutional investors and how the trading decision and the resulting gap are impacted by the investors’ ability to vote on the deals as well as other deal characteristics such as merger size, stock liquidity, initial holdings, and the institutional investors’ trading skills. Our study highlights that the group of investors who have influence over corporate actions do not necessarily bear the full consequences of such events, and therefore accounting for the dynamics of shareholder composition is critical in measuring investors’ incentives correctly.
