Mutual Fund Disagreement and Firm Value: Passive vs. Active Voice

Abstract

We develop a novel measure of disagreement in voice between active and passive mutual funds using their proxy votes that captures shareholder conflicts in public firms and examine the consequences of the disagreement for firm value. We show that the disagreement in voice between passive and active mutual funds leads to an economically large decrease in firm value when the vote outcome of a proposal is not perfectly anticipated. Our evidence suggests that the firm value loss we document is likely due to conflicting incentives between the two groups of mutual funds, instead of their differences of opinions about the quality of a proposal. Using Federal Open Market Committee announcements with press conferences as events that create scope for investors to make informed votes and interpret news differently for individual firms, we show that the value-destroying effect of the disagreement in voice due to conflicting incentives is causal. In contrast, when the outcome of a proposal is not anticipated, we show that the presence of the disagreement in voice marginally increases firm value. We provide evidence consistent with such disagreement being a form of shareholder monitoring that challenges management and it is interpreted in a positive way by the financial market participants.

Keywords: Corporate governance, Voting, Disagreement

JEL Classification: G14, G23, G34