The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market

Abstract:     
We use a unique setting to examine the role of institutional investors in influencing firm-level corporate governance through proxy voting. Using a comprehensive proprietary data set from the equity lending market, we find that institutional investors restrict or call back their loaned shares prior to the record date in order to exercise their voting right. We find higher recall for firms with weaker corporate governance, weaker performance, higher institutional ownership, and when antitakeover or compensation proposals are on the ballot. The recall is most pronounced for contentious events such as proxy fights, mergers, negative changes in ISS’s recommendation, and close votes in the previous year. Examining the subsequent vote outcome, we find higher recall to be associated with fewer FOR votes for management and more FOR votes for shareholder proposals. The influence of proxy advisory firm ISS is also evident in voting outcome. If ISS opposes management then we find the higher recall to be associated with less FOR votes for the proposal. We find an increase in borrowing demand on the record date, however there is no relation between borrowing demand and voting outcome. Our results indicate both that corporate governance is important to institutional investors and that the proxy process is an important channel for corporate governance.

Number of Pages in PDF File: 59

Keywords: Proxy Voting, Securities Lending, Institutional Investors

JEL Classification: G32, G34, G38

working papers series