Creating Controversy in Proxy Voting Advice

49 Pages Posted: 13 May 2021 Last revised: 16 Jun 2021

See all articles by Andrey Malenko

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR)

Nadya Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Date Written: June 5, 2021

Abstract

The quality of proxy advisors' voting recommendations is important for policymakers and industry participants. We analyze the design of recommendations (available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. We show that even if all shareholders' interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations "create controversy" about the vote, increasing the probability that the outcome is close and raising each shareholder's willingness to pay for advice. In contrast, it serves the interest of the proxy advisor to make private research reports unbiased and precise. Our results help reinterpret empirical patterns of shareholders' voting behavior.

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

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

Suggested Citation

Malenko, Andrey and Malenko, Nadya and Spatt, Chester S., Creating Controversy in Proxy Voting Advice (June 5, 2021). Available at SSRN: https://ssrn.com/abstract=3843674 or http://dx.doi.org/10.2139/ssrn.3843674

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nadya Malenko (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

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