Voting Methods for Director Election, Monitoring Costs, and Institutional Ownership

Abstract

We show that firms that employ the majority voting method for director election exhibit higher institutional ownership than firms that employ the plurality voting method, especially after the 2010 amendment to NYSE Rule 452. Firms that adopt majority voting in a bylaw or charter exhibit increases in institutional ownership and share price. These results are consistent with our conjecture that institutional investors favor companies with majority voting and investors react favorably to the adoption of majority voting because it reduces management monitoring costs by improving the accountability of elected board members.

Keywords: Majority Voting; Monitoring Costs; Institutional Investors; Director Accountability

JEL Classification: G34; G38