Who Coordinates Shareholder Votes? The Role of Proxy Advisors in Corporate Governance

Abstract

We examine the effect of proxy advisors on the firm. Contrary to critics’ concerns that following proxy-advisor recommendations leads to suboptimal contracting, our findings show that firms with proxy-advisor aligned owners have a higher marginal value of cash, superior operating performance, increased forced CEO turnover sensitivity to performance, and are less likely to make value-destroying acquisitions. Consistent with the information aggregation function of the proxy advisory process, proxy advisor influence is strongest in diffusely held firms. We address potential selection bias and infer causality by showing that these results only hold after coverage initiation by a proxy advisor. Overall, our study identifies circumstances under which proxy advisors mitigate collective action problems, and act as an efficient coordinating mechanism for institutional voting.