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Outsourcing Corporate Governance: Conflicts of Interest within the Proxy Advisory Industry

Management Science, Forthcoming

53 Pages Posted: 25 Aug 2016  

Tao Li

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: August 24, 2016

Abstract

Proxy advisory firms wield large influence with voting shareholders. However, conflicts of interest may arise when an advisor sells services to both investors and issuers. Using a unique dataset on voting recommendations, I find that for most types of proposals, competition from a new entrant reduces favoritism towards management by an incumbent advisor that serves both corporations and investors. The results are not driven by factors that influence the entrant's coverage decision, such as the marginal cost of new coverage or previously biased recommendations by the incumbent. Similar to other information intermediaries, biased advice by proxy advisors is shown to have real negative consequences, which allow management to enjoy greater private benefits. These results suggest conflicts of interest are a real concern in the proxy advisory industry, and increasing competition could help alleviate them.

Keywords: Proxy advisory firms, Conflicts of interest, Competition

JEL Classification: D43, D82, G34, L15

Suggested Citation

Li, Tao, Outsourcing Corporate Governance: Conflicts of Interest within the Proxy Advisory Industry (August 24, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2828690

Tao Li (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=7628

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