Which Firms Require More Governance? Evidence from Mutual Funds' Revealed Preferences

79 Pages Posted: 17 Feb 2021 Last revised: 29 Jun 2021

Date Written: April 2021

Abstract

This paper estimates mutual funds’ preferences for governance structures, using data on proxy vote records. I elicit funds’ revealed preferences by studying the differences in their votes on the same issue across their portfolio firms’ shareholder proposals, and develop funds’ preference rankings by implementing the Metropolis-Hastings Markov chain Monte Carlo algorithm. Funds prefer firms with low board independence, high insider ownership, and high abnormal compensation to adopt certain governance provisions that increase shareholder rights. Contrary to the view that the net benefits of takeover defenses are higher for young and small firms, funds are not enthusiastic about large and mature firms increasing shareholder rights. Large and mature firms are disproportionately targeted by shareholder proposals, suggesting the possibility that investors vote down worthless proposals submitted to such firms. I find a mixed relation between fund preferences and firm performance. Active and passive funds have similar preferences. Fund preferences are moderately correlated with overall vote support on relevant shareholder proposals.

Keywords: proxy voting, fund preferences, shareholder proposals, ranking, MCMC algorithm

JEL Classification: G30, G34, K30, K22, G18

Suggested Citation

Yi, Irene, Which Firms Require More Governance? Evidence from Mutual Funds' Revealed Preferences (April 2021). European Corporate Governance Institute – Finance Working Paper No. 769/2021, Available at SSRN: https://ssrn.com/abstract=3756114 or http://dx.doi.org/10.2139/ssrn.3756114

Irene Yi (Contact Author)

University of Toronto ( email )

Toronto
Canada

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