Proxy Advisory Firms: The Economics of Selling Information to Voters

Abstract

We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision-making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects. , and participants at multiple seminars and conferences for helpful comments. The authors do not have any conflicts of interest as identified in the Journal of Finance's disclosure policy.

The real effects of proxy advisors on the firm

“…This context suggests that there are circumstances under which third‐party recommendations can either crowd out or complement incentives for the acquisition of private information (Malenko & Malenko, ). We use the framework proposed by Malenko and Malenko () to formulate our hypothesis that relates the magnitude of PA influence to firm value. The intuition for the hypothesis is that the effect of third‐party voting recommendations on the firm depends upon how voters would have voted in the absence of a PA.…”

“…Voting provides aggregation of private information held by shareholders (Edelman, Thomas, & Thompson, 2014), yet shareholder voting is expensive and time consuming (Iliev & Lowry, 2015) and institutional voting suffers from collective action problems (Maug & Rydqvist, 2009). This context suggests that there are circumstances under which third-party recommendations can either crowd out or complement incentives for the acquisition of private information (Malenko & Malenko, 2019). We use the framework proposed by Malenko and Malenko (2019) to formulate our hypothesis that relates the magnitude of PA influence to firm value.…”

Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services*

“…Thus at a broad level, we extend understanding of which information intermediaries are price informative (e.g., Healy and Palepu, 2001;Beyer et al, 2010). We inform the debate on the value of governance information (e.g., Calluzzo and Dudley, 2019;Iliev et al, 2019;Malenko and Malenko, 2019) by demonstrating its high value to market participants. Our finding of a price impact extends the prior evidence on governance ratings which shows that their introduction increases the dissemination of governance information (Lehmann, 2019).…”

The Market for Conflicted Advice

“…Finally, our paper relates to the recent literature on persuasion and information disclosure in finance. Recent works include Bouvard, Chaigneau, and Motta (), Trigilia (), Malenko and Malenko (), Malenko and Tsoy (), and Orlov, Zryumov, and Skrzypacz ().…”

“…This setup also distinguishes our paper from the literature on selling information, where information is generally not exclusive. See Admati and Pfleiderer () for a seminal contribution and García and Sangiorgi () and Malenko and Malenko () for recent work.…”