Frenemies: How Do Financial Firms Vote on Their Own Kind?

The financial sector is unique in being largely self-governed: the majority of financial firms’ shares are held by other financial institutions. This raises the possibility that monitoring of financial firms is especially undermined by conflicts of interest due to personal and professional links between these firms and their shareholders. To investigate this possibility, we scrutinize the aspect of the financial sector’s self-governance that is directly observable: mutual fund companies’ voting of their peers’ stock. We find that considerations specific to investee firms’ membership in the same industry as their investors do indeed impact voting. This impact is in the direction of supporting the investee’s management. We show that the own-industry effect reduces director efficacy and lowers firm value as a result. We extend our analysis to other financial companies and show that they also tend to vote more favorably when it comes to their peers. Our results suggest that peer support is a corrupting factor in the financial sector’s governance.

Keywords: proxy voting, mutual funds, institutional investors, corporate governance

JEL Classification: G14, G23

Suggested Citation: Suggested Citation

Keswani, Aneel and Stolin, David and Tran, Anh L., Frenemies: How Do Financial Firms Vote on Their Own Kind? (July 23, 2015). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2568538 or http://dx.doi.org/10.2139/ssrn.2568538