The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design

Malenko, Nadya; Shen, Yao

doi:10.1093/rfs/hhw070

Cited by 239 publications

(80 citation statements)

References 34 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Proxy Advisors. Institutional investors commonly employ the services of one or more proxy advisors, such as ISS and Glass Lewis, which analyze voting choices faced by investors in public corporations and make recommendations (Malenko and Shen 2016). Critics of proxy advisors would prefer that institutional investors reduce their reliance on the analysis and recommendations provided by proxy advisors (Clark and Van Buren 2013).…”

Section: Discussionmentioning

confidence: 99%

The Agency Problems of Institutional Investors

Bebchuk¹,

Cohen

Hirst

2017

Journal of Economic Perspectives

250

View full text Add to dashboard Cite

Financial economics and corporate governance have long focused on the agency problems between corporate managers and shareholders that result from the dispersion of ownership in large publicly traded corporations. In this paper, we focus on how the rise of institutional investors over the past several decades has transformed the corporate landscape and, in turn, the governance problems of the modern corporation. The rise of institutional investors has led to increased concentration of equity ownership, with most public corporations now having a substantial proportion of their shares held by a small number of institutional investors. At the same time, these institutions are controlled by investment managers, which have their own agency problems vis-à-vis their own beneficial investors. We develop an analytical framework for understanding the agency problems of institutional investors, and apply it to examine the agency problems and behavior of several key types of investment managers, including those that manage mutual funds—both index funds and actively managed funds—and activist hedge funds. We show that index funds have especially poor incentives to engage in stewardship activities that could improve governance and increase value. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds. While their activities may partially compensate, we show that they do not provide a complete solution for the agency problems of other institutional investors.

show abstract

Section: Discussionmentioning

confidence: 99%

The Agency Problems of Institutional Investors

Bebchuk¹,

Cohen

Hirst

2017

Journal of Economic Perspectives

250

View full text Add to dashboard Cite

show abstract

“…Before 2012, ISS used to only undertake a deeper analysis of compensation policies for …rms with 1-and 3-year total shareholder returns below the industry median. Malenko and Shen (2016) exploit this rule for a regression discontinuity analysis: Falling narrowly below this cuto¤ led to greater scrutiny and a 15% increase (from 10% to 25%) in the probability of a negative ISS recommendation. The negative recommendation in turn led to a 25% reduction in say-onpay voting support.…”

Section: Proxy Advisory Firmsmentioning

confidence: 99%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. JEL-Codes: D310, D860, G340, M120. Terms of use: Documents in

show abstract

“…As defined in Section 4, a potentially biased recommendation occurs when ISS issues a "For" ("Against") recommendation for a management (shareholder) proposal, but the vote fails (passes). Restricting the sample to proposals that narrowly pass or fail can facilitate causal interpretation-within a narrow margin, proposals tend to pass or fail randomly (Cuñat, Gine, and Guadalupe, 2012;Malenko and Shen, 2016). The sample size for firms with proposals that narrowly pass (fail) is 148 (163).…”

Section: Bias In Recommendations and Real Effectsmentioning

confidence: 99%

“…The effect of ISS's recommendations has been estimated between 13-30%, depending on the type of proposal (e.g., Bethel and Gillan, 2002;Cai, Garner, and Walkling, 2009;Iliev and Lowry, 2015;Malenko and Shen, 2016). To my knowledge, only a few papers have studied the effects of Glass Lewis's recommendations, in addition to ISS's.…”

mentioning

confidence: 99%

Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

2018

Management Science

View full text Add to dashboard Cite

Proxy advisory firms wield large influence with voting shareholders. However, conflicts of interest may arise when an advisor sells services to both investors and issuers. Using a unique dataset on voting recommendations, I find that for most types of proposals, competition from a new entrant reduces favoritism towards management by an incumbent advisor that serves both corporations and investors. The results are not driven by factors that influence the entrant's coverage decision, such as the marginal cost of new coverage or previously biased recommendations by the incumbent. Similar to other information intermediaries, biased advice by proxy advisors is shown to have real negative consequences, which allow management to enjoy greater private benefits. These results suggest conflicts of interest are a real concern in the proxy advisory industry, and increasing competition could help alleviate them. * I am very grateful for the guidance and support from

show abstract

The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design

Cited by 239 publications

References 34 publications

The Agency Problems of Institutional Investors

The Agency Problems of Institutional Investors

Executive Compensation: A Survey of Theory and Evidence

Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

Contact Info

Product

Resources

About