Picking Friends Before Picking (Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests

Abstract

This paper studies mutual fund voting in proxy contests using a comprehensive sample of voting records over the period 2008-2015, taking into account selective targeting by activists. We find that firm, fund, and event characteristics generate substantial heterogeneity among investors in their support for the dissident, including their reliance on proxy advisors. Notably, active funds are significantly more pro-dissident than passive funds. We also uncover evidence consistent with a large unobserved fund "inherent stance" that cannot be explained by observable fund or event characteristics. In particular, we document a positive correlation between the propensity for targeting by activists and pro-activist voting by mutual funds, based both on observables and unobservables. This finding suggests that a relatively pro-activist shareholder base is a key factor driving activists' selection of targets.

Keywords: Mutual fund voting, Proxy contest, Selective targeting, Investor stance

JEL Classification: G23, G3