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When do proxy advisors improve corporate decisions?

Author

Listed:
  • Berno Buechel

    (University of Fribourg - Faculty of Economics and Social Science)

  • Lydia Mechtenberg

    (University of Hamburg)

  • Alexander F. Wagner

    (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute)

Abstract

There is an ongoing debate about how proxy advisory firms affect corporate decisions. A major concern is that shareholders seeking to save costs use a proxy advisor's vote recommendation as substitute for own research, thereby reducing efficiency of shareholder decision-making. We show that the opposite effect -- complementarity between a proxy advisor's recommendation and shareholders' research effort -- occurs if two conditions are met: (i) the board of directors is sufficiently well informed; and (ii) shareholders can condition their investment in research on the proxy advisor's recommendation. Then, a proxy advisor with information quality sufficiently close to that of the board's strictly improves corporate decisions, while a proxy advisor with a more diverging information quality leaves corporate decisions unaffected.

Suggested Citation

  • Berno Buechel & Lydia Mechtenberg & Alexander F. Wagner, 2022. "When do proxy advisors improve corporate decisions?," Swiss Finance Institute Research Paper Series 22-47, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2247
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    Cited by:

    1. Laurent Bouton & Aniol Llorente-Saguer & Antonin Macé & Adam Meirowitz & Shaoting Pi & Dimitrios Xefteris, 2022. "Public Information as a Source of Disagreement Among Shareholders," NBER Working Papers 30757, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Proxy advisors; strategic voting;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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