Management Science, Forthcoming
53 Pages Posted: 25 Aug 2016
Date Written: August 24, 2016
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: 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