CGE-6: Institutional Investors and Shareholder Voting
9:00am - 10:30am
Session Chair: Ruediger Fahlenbrach, École Polytechnique Fédérale de Lausanne (EPFL)
Are Shareholder Votes Rigged?
Daniel Metzger, Laurent Bach
Stockholm School of Economics
Discussant(s): Moqi Groen-Xu (London School of Economics)
We show that since 2003 there have been 75% more shareholder proposals rejected by a margin of one percent of shares outstanding than proposals that were approved by a similarly narrow margin. As a result, there is a large and discontinuous drop in the density of voting results on these proposals exactly where the majority threshold of each proposal is located. Using counterfactual distributions, we estimate that 11% of closely-contested proposals that were eventually rejected by voters would have passed if management had not been able to systematically affect the voting results. These results confirm that management holds vast and exclusive powers over the voting process at big US corporations and imply that these powers are used by entrenched managers to block valuable improvements to corporate governance. Our findings also have important implications for empirical researchers in corporate governance who use RDD to identify causal effects of corporate governance.
Blockholder Heterogeneity, Multiple Blocks, and the Dance Between Blockholders
Miriam Schwartz-Ziv, Hadlock Charles
Michigan State University
Discussant(s): Francisco Urzua (Erasmus University Rotterdam)
We study the determinants of blockholder presence in a sample of 129,532 blockholdings distributed over 47,614 U.S. publicly listed firms from 2001 to 2014. The mechanism governing the determinants of blockholder presence for all blockholders grouped together differs in substantive ways from the mechanisms governing each individual type of blockholder, suggesting substantial blockholder heterogeneity. These differences offer insights into the roles of different blockholders in corporate governance, and also into blockholders’ underlying motivations and technologies. We find strong evidence suggesting that blockholder investment decisions are interdependent. Smaller blocks, particularly those of financial institutions, display substantial positive interdependence in the sense that the presence of one blockholder is associated with a greater than average likelihood of observing additional blockholders. Larger blocks, particularly those held by non-financial firms, display strong negative interdependence. This evidence for small and financial blocks is generally consistent with theories of blockholder governance through trading, while the evidence on other block interactions is better described by theories of monitoring and private benefits of control.
Monitoring the Monitor: Distracted Institutional Investors and Board Governance
Claire Yang Liu1, Angie Low2, Ronald Masulis1, Le Zhang1
1University of New South Wales; 2Nanyang Technological University
Discussant(s): Alberto Manconi (Bocconi University)
While board decisions are crucial to shareholder wealth, the literature often overlooks how shareholder monitoring shapes board governance. Using exogenous variations in investor monitoring intensity caused by unrelated return shocks in portfolio firms, we find that institutional investor distraction weakens board oversight. Distracted institutional investors are less likely to use their votes to discipline ineffective independent directors. As a result, independent directors miss more meetings and boards hold fewer meetings. Further, firms with distracted institutional investors appoint less effective independent directors to their boards, approve higher CEO excess pays and accept greater earnings management, all of which indicate poorer board monitoring quality. Our findings suggest that institutional investor monitoring represents an important determinant of board monitoring incentives.