The Party Structure of Mutual Funds

Abstract

We investigate the structure of mutual funds’ corporate governance preferences as revealed by how they vote their shares in portfolio companies. We apply unsupervised learning tools from the machine learning literature to analyze a comprehensive dataset of mutual funds’ votes and find that a parsimonious two-dimensional model can explain the bulk of mutual fund voting. The two dimensions capture competing visions of corporate governance and are closely related to the recommendations of the leading proxy advisors. Model-based cluster analysis shows that mutual funds are organized into three ‘parties’—the Traditional Governance Party, the Shareholder Reform Party, and the Shareholder Protest Party—that follow distinctive philosophies of corporate governance and shareholders’ role. Our preference measures for mutual funds generate a range of insights about the broader system of corporate governance.

Keywords: mutual funds, proxy voting, spatial models, corporate governance

JEL Classification: G30, G23