Phantom of the Opera: ETF Shorting and Shareholder Voting

73 Pages Posted: 26 Mar 2019 Last revised: 20 Apr 2022

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; European Corporate Governance Institute (ECGI)

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania

Michael Young

University of Missouri at Columbia - Department of Finance

Date Written: April 15, 2022

Abstract

The short-selling of exchange-traded funds (ETFs) creates “phantom” ETF shares, trading at market prices, with cash flows rights but no associated voting rights. Unlike regular ETF shares backed by underlying securities that are voted as directed by the ETF sponsor, phantom ETF shares hedged by the underlying basket as part of market-making activities result in a significant number of sidelined votes of the underlying securities. We find increases in phantom shares for the corresponding underlying securities are associated with decreases in the number of proxy votes cast (for and against), and increases in broker non-votes, voting premiums, and value-reducing acquisitions.

Keywords: Exchange-Traded Funds, Proxy Voting, Broker Non-Vote, Voting Premium, Short Interest, Operational Shorting, Authorized Participants, ETF Market Making, Voting of Hedged Positions, Empty Voting

JEL Classification: G11, G12, G14, G23, G34

Suggested Citation

Evans, Richard B. and Karakaş, Oğuzhan and Moussawi, Rabih and Young, Michael, Phantom of the Opera: ETF Shorting and Shareholder Voting (April 15, 2022). European Corporate Governance Institute – Finance Working Paper No. 763/2021, Available at SSRN: https://ssrn.com/abstract=3345799 or http://dx.doi.org/10.2139/ssrn.3345799

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

Cambridge Judge Business School - Finance Subject Group ( email )

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

HOME PAGE: http://jbs.cam.ac.uk/faculty-research/faculty-a-z/oguzhan-karakas/

European Corporate Governance Institute (ECGI) ( email )

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

HOME PAGE: http://ecgi.global/users/o%C4%9Fuzhan-karaka%C5%9F

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 ( email )

3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6301
United States

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

Michael Young (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Columbia, MO 65211
United States

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