Do Governance Mechanisms Matter for Mutual Funds?

40 Pages Posted: 20 Mar 2007

See all articles by Julia Chou

Julia Chou

Florida International University

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: March 2007

Abstract

The paper finds evidence that corporate governance mechanisms matter for mutual funds, especially funds with better governance standards. Using new and unexplored mutual fund governance data, we show that corporate governance mechanisms play a role in both the investment decisions and the monitoring efforts of mutual funds. Mutual funds, in general, tend to tilt their portfolios toward firms with strong corporate governance, and this is more evident in funds with good governance practices. We further find that corporate governance also affects fund proxy voting decisions. Such voting decisions are indicative of the funds' efforts aimed at monitoring corporate activities supporting mutual fund activism. Funds with better governance tend to vote against management's, but consistent with Institutional Shareholder Services' negative recommendations on management-sponsored proposals relating to antitakeover, board quality, and director election. Overall, our evidence suggests that well-governed, while not poorly-governed, mutual funds do perform their fiduciary duties and act in the interests of their shareholders.

Keywords: proxy voting, Morningstar stewardship grade, mutual funds, governance mechanisms

JEL Classification: G11, G23, G34

Suggested Citation

Chou, Wen-Hsiu and Ng, Lilian and Wang, Qinghai, Do Governance Mechanisms Matter for Mutual Funds? (March 2007). Available at SSRN: https://ssrn.com/abstract=972235 or http://dx.doi.org/10.2139/ssrn.972235

Wen-Hsiu Chou

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Lilian Ng (Contact Author)

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

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

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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