The Index-Fund Dilemma: An Empirical Study of the Lending-Voting Tradeoff

44 Pages Posted: 27 Sep 2020 Last revised: 10 Apr 2021

See all articles by Edwin Hu

Edwin Hu

New York University School of Law

Joshua Mitts

Columbia Law School

Haley Sylvester

New York University School of Law

Date Written: December 22, 2020

Abstract

Institutional investors' role in shareholder voting is among the most hotly debated subjects in corporate governance. Some argue that institutions lack adequate incentives to effectively monitor managers; others contend that the largest institutions have developed analytical resources that produce informed votes. But little attention has been paid to the tradeoff these institutions face between voting their shares and earning profits—both for themselves and for the ultimate beneficiary of institutional funds—by lending those shares.

Using a unique dataset and a recent change in SEC rules as an empirical setting, we document a substantial increase in the degree to which large institutions lend shares rather than cast votes in corporate elections. We show that, after the SEC clarified funds’ power to lend shares rather than vote them at shareholder meetings, institutions supplied 58\% more shares for lending immediately prior to those meetings. The change is concentrated in stocks with high index fund ownership; a difference-in-differences approach shows that supply increases from 15.6\% to 22.3\% in those stocks. Even when it comes to proxy fights, we show, stocks with high index ownership see a marked increase in shares available for lending immediately prior to the meeting. Overall, we show that loosening the legal constraints on institutional share lending has had significant implications for how index funds balance the lending-voting tradeoff.

Keywords: Index funds, passive investing, share lending, proxy voting, corporate governance, SEC, fiduciary duty

JEL Classification: G23, G34, K22

Suggested Citation

Hu, Edwin and Mitts, Joshua and Sylvester, Haley, The Index-Fund Dilemma: An Empirical Study of the Lending-Voting Tradeoff (December 22, 2020). NYU Law and Economics Research Paper No. 20-52 , Columbia Law and Economics Working Paper No. 647, Available at SSRN: https://ssrn.com/abstract=3673531 or http://dx.doi.org/10.2139/ssrn.3673531

Edwin Hu (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Joshua Mitts

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Haley Sylvester

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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