Phantom of the Opera: ETFs and Shareholder Voting

32 Pages Posted: 18 Dec 2018 Last revised: 4 Oct 2019

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Oğuzhan Karakaş

Cambridge Judge Business School - Finance Subject Group

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania - The Wharton School

Michael Young

University of Virginia - Darden School of Business

Date Written: November 26, 2018

Abstract

Short-selling and liquidity provision in Exchange-Traded Funds creates ETF shares with cash flows rights but no associated voting rights. These "phantom shares" trade at ETF market prices, but, because they are not backed by the underlying basket of securities held by the ETF sponsor’s custodian they are not voted by the sponsor, removing any associated voting rights. We introduce a novel measure of phantom shares, and show that in proxy voting of the underlying stocks of the ETF, it is associated with an increase in broker non-votes and a corresponding decrease in both votes for and against. We also find that increases in our measure of phantom shares reflecting a decrease in the total outstanding shares to be voted, is associated with an increase in the vote premium during shareholder meetings with close votes, proxy contests, special meeting items, or if ISS recommended voting against the item.

Keywords: Exchange-Traded Funds, Vote Premium, Proxy Voting, Short Interest, Operational Shorting, Authorized Participants

JEL Classification: G1, G12, G14, G23, G34

Suggested Citation

Evans, Richard B. and Karakaş, Oğuzhan and Moussawi, Rabih and Young, Michael, Phantom of the Opera: ETFs and Shareholder Voting (November 26, 2018). Available at SSRN: https://ssrn.com/abstract=3303149 or http://dx.doi.org/10.2139/ssrn.3303149

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Oğuzhan Karakaş (Contact Author)

Cambridge Judge Business School - Finance Subject Group ( email )

University of Cambridge
Trumpington St.
Cambridge, CB2 1AG
United Kingdom

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania - The Wharton School ( email )

United States

Michael Young

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22904
United States

HOME PAGE: http://www.michaelyoungphd.com/

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