The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design

Review of Financial Studies, Vol. 29, No. 12, December 2016

45 Pages Posted: 19 Nov 2014 Last revised: 20 Jan 2017

See all articles by Nadya Malenko

Nadya Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Yao Shen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: December 1, 2016

Abstract

Proxy advisory firms have become important players in corporate governance, but the extent of their influence over shareholder votes is debated. We estimate the effect of Institutional Shareholder Services (ISS) recommendations on voting outcomes by exploiting exogenous variation in ISS recommendations generated by a cutoff rule in its voting guidelines. Using a regression discontinuity design, we find that in 2010-2011, a negative ISS recommendation on a say-on-pay proposal leads to a 25 percentage point reduction in say-on-pay voting support, suggesting strong influence over shareholder votes. We also use our setting to examine the informational role of ISS recommendations.

Keywords: proxy advisors, ISS, proxy voting,regression discontinuity, say-on-pay, executive compensation, shareholder activism

JEL Classification: D72, G34, J33, M12

Suggested Citation

Malenko, Nadya and Shen, Yao, The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design (December 1, 2016). Review of Financial Studies, Vol. 29, No. 12, December 2016, Available at SSRN: https://ssrn.com/abstract=2526799 or http://dx.doi.org/10.2139/ssrn.2526799

Nadya Malenko (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yao Shen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Ave
New York, NY 10010
United States

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