Proxy Advisory Firms: The Economics of Selling Information to Voters

Abstract

We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision-making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects.

Keywords: Proxy advisors, sale of information, information acquisition, shareholder voting, strategic voting, information aggregation

JEL Classification: D42, D71, D72, D82, G34, G38, L12