Which Firms Require More Governance? Evidence from Mutual Funds' Revealed Preferences

Abstract

This paper estimates mutual funds' governance preferences, revealing a consensus regarding which companies they prefer to see enhanced shareholder rights. This consensus substantially departs from patterns observed in overall vote support. Funds prefer firms with agency problems to enhance shareholder rights; however, contrary to conventional wisdom, they show limited enthusiasm for such reforms in underperforming, large, or mature firms. The evidence paints a nuanced picture of mutual fund monitoring: they do not follow a “one-size-fits-all” voting strategy and adapt their voting to address firms' governance needs, yet they might not consider all aspects important for determining optimal shareholder rights.

Keywords: proxy voting, mutual funds, shareholder proposals, machine learning

JEL Classification: G30, G34, K30, K22, G18