Proxy Advisory Firms: The Economics of Selling Information to Voters

54 Pages Posted: 3 Apr 2016 Last revised: 1 Oct 2019

See all articles by Andrey Malenko

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR)

Nadya Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: October 1, 2019

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

Suggested Citation

Malenko, Andrey and Malenko, Nadya, Proxy Advisory Firms: The Economics of Selling Information to Voters (October 1, 2019). Journal of Finance, Vol 74, No. 5, October 2019 , Available at SSRN: https://ssrn.com/abstract=2757597 or http://dx.doi.org/10.2139/ssrn.2757597

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nadya Malenko (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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