Frenemies: How Do Financial Firms Vote on Their Own Kind?
Management Science, Forthcoming
43 Pages Posted: 24 Feb 2015 Last revised: 2 Dec 2015
Date Written: July 23, 2015
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