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Ties that Bind:How business connections affect mutual fund activism

Listed author(s):
  • Dragana Cvijanovic
  • Amil Dasgupta
  • Konstantinos Zachariadis
Registered author(s):

    We investigate how business ties with portfolio firms influence mutual funds’ proxy voting using a comprehensive dataset spanning 2003 to 2011. In sharp contrast to the prior literature, we show that the proxy voting of mutual funds is significantly influenced by their business ties with portfolio firms. Our result holds at the level of individual proposals after robustly controlling for unobserved heterogeneity across firms and fund families and over time as well as for the e?ects of ISS recommendations and fund family holdings. We also show that the influence of business ties on proxy voting is strongest for highly contested shareholder proposals where proxy votes are most relevant for firm value. Finally, we show that the prominent class action lawsuits of 2006 against 401(K) sponsors and providers had di?erential e?ects on the voting of di?erent fund families depending on whether they were sued, thus unearthing a potential link between investor attention and corporate governance.

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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/DP731-final.pdf
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    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp731.

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    Date of creation: 2014
    Handle: RePEc:fmg:fmgdps:dp731
    Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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    1. Comment, Robert & Schwert, G. William, 1995. "Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures," Journal of Financial Economics, Elsevier, vol. 39(1), pages 3-43, September.
    2. Lauren Cohen & Breno Schmidt, 2009. "Attracting Flows by Attracting Big Clients," Journal of Finance, American Finance Association, vol. 64(5), pages 2125-2151, October.
    3. Goldman, Eitan & Strobl, Günter, 2013. "Large shareholder trading and the complexity of corporate investments," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 106-122.
    4. Davis, Gerald F. & Kim, E. Han, 2007. "Business ties and proxy voting by mutual funds," Journal of Financial Economics, Elsevier, vol. 85(2), pages 552-570, August.
    5. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, 04.
    6. Ashraf, Rasha & Jayaraman, Narayanan & Ryan, Harley E., 2012. "Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(03), pages 567-588, August.
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