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

Abstract

I study the effect of mutual funds’ securities lending activities on their participation in proxy voting using hand-collected fund securities lending data. Consistent with Shleifer and Vishny’s (1986) argument that a shareholder’s willingness to monitor a firm decreases as the cost of monitoring increases, I find that mutual funds that lend securities are less likely to vote in the shareholder meetings of their portfolio firms. The negative effect is weaker if a fund holds a larger stake in the stock, especially poorly performing stocks, suggesting that lending funds are more likely to give up securities lending income and recall stocks to vote when the potential gains from voting are greater. This negative effect of securities lending on voting participation is also weaker if other funds in the same fund family are active voters. Although securities lending impedes fund voting on average, I find that it increases fund voting, due to a “lock-in” effect, in a subset of fund families in which funds are restricted from selling upon short-selling signals and vote more actively.

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

JEL Classification: G11; G23; G34