Customers as Friendly Shareholders: Uncovering the Complex Mutual Fund-Broker Relationship

Management Science, Forthcoming

69 Pages Posted: 23 Nov 2020 Last revised: 9 Sep 2023

See all articles by Nitish Kumar

Nitish Kumar

University of Florida

Yuehua Tang

University of Florida - Department of Finance

Kelsey D. Wei

University of Texas at Dallas

Date Written: November 23, 2020

Abstract

This paper examines mutual funds’ dual role as both clients and shareholders of broker banks. Mutual funds are more likely to hold and significantly overweight stocks of their broker banks. In line with the portfolio decisions, fund voting is biased towards broker management in contentious proposals. Such voting bias is inconsistent with maximizing broker banks’ shareholder value yet significantly affects voting outcomes and the presence of contentious proposals at the banks’ shareholder meetings. Furthermore, we show that while client funds are rewarded with preferential IPO allocations from connected brokers for their voting support, fund managers’ engagement in reciprocal practices is ultimately determined by the economic tradeoffs they face. Our study not only uncovers a new mechanism—being brokers’ friendly shareholders—through which the two parties maintain their quid pro quo relationships, but also raises a broader concern about governance of important financial institutions.

Keywords: Mutual funds, brokerage firms, investment banks, proxy voting, IPO allocations

JEL Classification: G11, G23, G24, G30

Suggested Citation

Kumar, Nitish and Tang, Yuehua and Wei, Kelsey D., Customers as Friendly Shareholders: Uncovering the Complex Mutual Fund-Broker Relationship (November 23, 2020). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3711791 or http://dx.doi.org/10.2139/ssrn.3711791

Nitish Kumar

University of Florida ( email )

Gainesville, FL 32611
United States

Yuehua Tang (Contact Author)

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

Kelsey D. Wei

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

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