Are Passive Investors Also Passive Voters? Evidence From Securities Lending by Mutual Funds

Abstract

Using hand-collected data on mutual funds’ securities lending activities, I find that funds that have benefited from securities lending are less likely to participate in proxy voting of their portfolio firms in the future. The negative effect of security lending on fund voting participation almost disappears during the 2008 short sale ban period when the lending business is forbidden by regulation. The negative effect is weaker if other funds in the same fund family are active voters, or if a fund holds a larger stake in the stock, especially poorly performing stocks. Overall, mutual funds view security lending income as an opportunistic cost of monitoring and become less willing to monitor a firm as the cost increases.

Keywords: Securities lending; proxy voting; corporate governance; mutual funds; short selling

JEL Classification: G11; G23; G34