The Role of Mutual Funds in Corporate Governance: Evidence from Mutual Funds’ Proxy Voting and Trading Behavior

Abstract:     
When mutual funds are dissatisfied with the management of their portfolio firms, they can either exit by selling shares or attempt to directly influence corporate decisions by voting against management at shareholder meetings. This paper analyzes mutual funds’ uses and choices between these two governance approaches by examining the 100 largest mutual fund families’ proxy voting records on governance-related proposals and their exit/non-exit decisions from July 2003 to June 2006. Although both exit and voting are important governance mechanisms, mutual funds are more inclined to vote against management than exit when the management’s recommendations on proposals conflict with those of the independent proxy research firm, Institutional Shareholder Services (ISS). The decision to vote against management or exit is related to fund and firm characteristics. In particular, mutual funds with shorter investment horizons, smaller ownership stakes, higher likelihood to have pension business ties with the firm, and from smaller fund families are more likely to exit rather than vote against management, and funds are more likely to exit the small, value, and liquid firms with larger insider and other institutional ownership. Overall, these findings are consistent with mutual funds playing an active role in corporate governance.

Number of Pages in PDF File: 44

Keywords: mutual funds, proxy voting, trading, governance

JEL Classification: G23, G34

working papers series