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

Management Science, Forthcoming

43 Pages Posted: 24 Feb 2015 Last revised: 2 Dec 2015

See all articles by Aneel Keswani

Aneel Keswani

Faculty of Finance, Cass Business School, City University, London

David Stolin

Toulouse Business School - Economics and Finance

Anh L. Tran

Cass Business School, City University London

Date Written: July 23, 2015

Abstract

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

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

Aneel Keswani

Faculty of Finance, Cass Business School, City University, London ( email )

106 Bunhill Row
London EC1Y 8TZ
Great Britain
+44 207 040 8763 (Phone)

David Stolin (Contact Author)

Toulouse Business School - Economics and Finance ( email )

20, bd Lascrosses - BP 7010
Toulouse Cedex 7, 31068
France

Anh L. Tran

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44-207-040-5109 (Phone)
+44-207-040-8881 (Fax)

HOME PAGE: http://https://www.cass.city.ac.uk/faculties-and-research/experts/anh-tran

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