Phantom of the Opera: ETFs and Shareholder Voting

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