Thy Neighbor's Vote: Peer Effects in Proxy Voting

Abstract

Institutional investors' proxy voting decisions are influenced by their neighbors. I identify peer effects in proxy voting by exploiting the variation in the voting behavior of publicly traded financial institutions induced by close-call votes on shareholder-sponsored governance proposals at these institutions. I first show that the passage of a close vote at a focal institution increases the likelihood that the focal institution votes against management. Using a triple-differences approach, I find that passing a close vote at a focal institution increases the likelihood that its neighboring institutions vote against management in stocks that are heavily held by the focal institution. This effect is particularly strong when the proposal up for a vote is contentious. I further show that peer effects in voting behavior at the institution level have aggregate effects on actual vote outcomes. These results suggest that peer influence is an important determinant of proxy voting behavior.

Keywords: Peer effects, Proxy voting, Institutional investors, Geography, Corporate governance

JEL Classification: G23, G32, G34