Uninformed Shareholders and the Efficacy of Proxy Voting
55 Pages Posted: 8 Feb 2018 Last revised: 15 Dec 2018
Date Written: December 14, 2018
We investigate the influence and implications of uninformed shareholder participation in the proxy voting process. Using the auditor ratification vote – a setting where assessing the appropriateness of the voting decision is arguably much easier relative to other proxy vote settings – we find that, on average, shareholder votes against auditor ratification are not associated with audit failures (restatements) but are strongly associated with investment performance (stock returns). However, using institutional ownership as a proxy for the extent to which the voting base is likely to be informed, we find evidence that the auditor ratification vote is more informed (i.e., driven by factors that reflect auditor performance) when institutional ownership is higher. Finally, we find that the probability of auditor dismissal is increasing in the proportion of votes against auditor ratification, regardless of the level of institutional ownership. Collectively, our results suggest that some auditors are dismissed for factors unrelated to auditor performance. More generally, our results suggest that votes cast by uninformed shareholders may limit the efficacy of proxy voting as a governance tool.
Keywords: proxy voting, uninformed shareholders, corporate governance, auditor ratification
JEL Classification: M41, M42
Suggested Citation: Suggested Citation