Creating Controversy in Proxy Voting Advice

Abstract

We analyze the design of recommendations (available to all shareholders) and research reports (available only to subscribers) by a proxy advisor, who maximizes profits from selling information to shareholders. We show that the advisor benefits from biasing its recommendations against the a priori more likely alternative, thereby "creating controversy" for the vote. In contrast, it serves the advisor's interest to produce precise and unbiased research reports. Our results help reinterpret empirical patterns of shareholders' voting behavior, suggesting that proxy advisors' recommendations may not be a suitable benchmark for evaluating shareholders' votes. Our model also rationalizes the one-size-fits-all approach in recommendations.


The Online Appendix is available at https://www.nadyamalenko.com/Malenko,Malenko,Spatt_OnlineAppendix.pdf.

Keywords: proxy advisor, voting, sale of information, information design, Bayesian persuasion, controversy, bias, corporate governance

JEL Classification: D72, D82, D83, G34, K22