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

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