Political Affinity and Mutual Fund Voting Schizophrenia

Abstract

We study whether mutual fund managers' voting behavior is affected by their political affinity with the portfolio firms' CEOs. We document that common political affinity induces the fund manager to come to the CEO's help when such help is required – i.e., especially during contentious proxy proposals. Such support is not driven by a quid pro quo that provides the fund manager with better performance – either in the form of higher investment value or better information-based trading strategy – but due to the desire to aid a politically affine CEO. Given that such help is difficult to justify, the politically motivated asset managers tend to engage in signal jamming by on average not providing detectable assistance. Such behavior is more potent when the prevailing political power in the White House is of a different color, as well as in the presence of greater reputational concerns – i.e., supporting CEOs of firms with worse ESG rankings. Political affinity, by distorting the voting incentives of mutual funds, reduces firm value.