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Do Governance Mechanisms Matter for Mutual Funds?
Wen-Hsiu Chou Florida International University Lilian K. Ng University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business Qinghai Wang Georgia Institute of Technology March 2007 Abstract: The paper finds evidence that corporate governance mechanisms matter for mutual funds, especially funds with better governance standards. Using new and unexplored mutual fund governance data, we show that corporate governance mechanisms play a role in both the investment decisions and the monitoring efforts of mutual funds. Mutual funds, in general, tend to tilt their portfolios toward firms with strong corporate governance, and this is more evident in funds with good governance practices. We further find that corporate governance also affects fund proxy voting decisions. Such voting decisions are indicative of the funds' efforts aimed at monitoring corporate activities supporting mutual fund activism. Funds with better governance tend to vote against management's, but consistent with Institutional Shareholder Services' negative recommendations on management-sponsored proposals relating to antitakeover, board quality, and director election. Overall, our evidence suggests that well-governed, while not poorly-governed, mutual funds do perform their fiduciary duties and act in the interests of their shareholders.
Keywords: proxy voting, Morningstar stewardship grade, mutual funds, governance mechanisms JEL Classifications: G11, G23, G34 Working Paper SeriesDate posted: March 20, 2007 ; Last revised: March 20, 2007Suggested CitationContact Information
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