One-Size-Fits-All: Voting Recommendations by Proxy Advisors

56 Pages Posted: 11 Oct 2018 Last revised: 9 Feb 2020

See all articles by Doron Levit

Doron Levit

University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)

Anton Tsoy

University of Toronto - Department of Economics

Date Written: February 7, 2020

Abstract

Proxy advisors are often criticized for issuing “one-size-fits-all” voting recommendations, having severe conflicts of interests, and lacking transparency. We analyze a model that ties these features together. In equilibrium, one-size-fits-all recommendations emerge as a means to conceal the proxy advisor's conflict of interest and increase his influence on investors. Greater transparency reduces the incidence of one-size-fits-all recommendations, but may harm investors by diminishing proxy advisors’ incentives to collect information. The rise of common ownership and regulations that limit outsourcing of voting decisions to proxy advisors increase the prevalence of one-size-fits-all recommendations and may harm investors by diminishing their informativeness.

Keywords: One-Size-Fits-All, Proxy Advisors, Corporate Governance, Voting, Regulation Recommendation, Cheap Talk

JEL Classification: D74, D83, G23, G32, G34

Suggested Citation

Levit, Doron and Tsoy, Anton, One-Size-Fits-All: Voting Recommendations by Proxy Advisors (February 7, 2020). Available at SSRN: https://ssrn.com/abstract=3251742 or http://dx.doi.org/10.2139/ssrn.3251742

Doron Levit

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Anton Tsoy (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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