Political Affinity and Mutual Fund Voting Schizophrenia
52 Pages Posted: 19 Jan 2021 Last revised: 27 Jan 2021
Date Written: January 10, 2021
We study whether mutual fund managers' voting behavior is affected by their political affinity with the portfolio firms' CEOs. We document that common political affinity induces the fund manager to come to the CEO's help when such help is required – i.e., especially during contentious proxy proposals. Such support is not driven by a "quid pro quo" that provides the fund manager with better performance – either in the form of higher investment value or better information-based trading strategy – but due to the desire to aid a politically affine CEO. Given that such help is difficult to justify, the politically motivated asset managers tend to engage in signal jamming by on average not providing detectable assistance. Such behavior is more potent when the prevailing political power in the White House is of a different color, as well as in the presence of greater reputational concerns – i.e., supporting CEOs of firms with worse ESG rankings. Political affinity, by distorting the voting incentives of mutual funds, reduces firm value.
Keywords: ideology, political affinity, mutual fund voting, contentious proposals, voting divergence
JEL Classification: G12, G3, G32
Suggested Citation: Suggested Citation