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Outsourcing Shareholder Voting to Proxy Advisory Firms

Author

Listed:
  • David F. Larcker
  • Allan L. McCall
  • Gaizka Ormazabal

Abstract

This paper examines the economic consequences of institutional investors outsourcing research and voting decisions in public company elections to proxy advisory firms. We investigate the implications of these decisions in the context of shareholder say-on-pay voting required in 2011 under the Dodd-Frank Act. We find three primary results: proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes, a substantial number of firms change their compensation programs in the time period before formal shareholder votes in a manner consistent with the features known to be favored by proxy advisory firms in an effort to avoid negative voting recommendations, and the stock market reaction to these compensation program changes is statistically negative. These results suggest that outsourcing voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.

Suggested Citation

  • David F. Larcker & Allan L. McCall & Gaizka Ormazabal, 2015. "Outsourcing Shareholder Voting to Proxy Advisory Firms," Journal of Law and Economics, University of Chicago Press, vol. 58(1), pages 173-204.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/682910
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    References listed on IDEAS

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    1. Larcker, David F., 1983. "The association between performance plan adoption and corporate capital investment," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 3-30, April.
    2. Yonca Ertimur & Fabrizio Ferri & David Oesch, 2013. "Shareholder Votes and Proxy Advisors: Evidence from Say on Pay," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 951-996, December.
    3. Cai, Jie & Walkling, Ralph A., 2011. "Shareholders’ Say on Pay: Does It Create Value?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(02), pages 299-339, April.
    4. Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2011. "The market reaction to corporate governance regulation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 431-448, August.
    5. K. J. Martijn Cremers & Roberta Romano, 2011. "Institutional Investors and Proxy Voting on Compensation Plans: The Impact of the 2003 Mutual Fund Voting Disclosure Rule," American Law and Economics Review, Oxford University Press, vol. 13(1), pages 220-268.
    6. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    7. repec:bla:joares:v:38:y:2000:i::p:171-202 is not listed on IDEAS
    8. Larcker, David F. & McCall, Allan L. & Ormazabal, Gaizka, 2013. "Proxy advisory firms and stock option repricing," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 149-169.
    9. Jennifer E. Bethel & Stuart L. Gillan, 2002. "The Impact of the Institutional and Regulatory Environment on Shareholder Voting," Financial Management, Financial Management Association, vol. 31(4), Winter.
    10. Carr Bettis & John Bizjak & Jeffrey Coles & Swaminathan Kalpathy, 2010. "Stock and Option Grants with Performance-based Vesting Provisions," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3849-3888, October.
    11. Jie Cai & Jacqueline L. Garner & Ralph A. Walkling, 2009. "Electing Directors," Journal of Finance, American Finance Association, vol. 64(5), pages 2389-2421, October.
    12. Morgan, Angela & Poulsen, Annette & Wolf, Jack, 2006. "The evolution of shareholder voting for executive compensation schemes," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 715-737, September.
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    Cited by:

    1. Susanna Gallani, 2015. "Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts," Harvard Business School Working Papers 16-019, Harvard Business School, revised Dec 2016.
    2. repec:oup:rfinst:v:29:y:2016:i:12:p:3394-3427. is not listed on IDEAS
    3. repec:eee:jfinec:v:125:y:2017:i:2:p:389-415 is not listed on IDEAS
    4. Isil Erel & LĂ©a H. Stern & Chenhao Tan & Michael S. Weisbach, 2018. "Selecting Directors Using Machine Learning," NBER Working Papers 24435, National Bureau of Economic Research, Inc.
    5. Weili Ge & Lloyd Tanlu & Jenny Li Zhang, 2016. "What are the consequences of board destaggering?," Review of Accounting Studies, Springer, vol. 21(3), pages 808-858, September.

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