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« Back to Results

Active and Passive Investors

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Hilton Atlanta, 212-213-214
Hosted By: American Finance Association
  • Chair: Francesca Cornelli, London Business School

Picking Friends Before Picking (Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests

Alon Brav
,
Duke University
Wei Jiang
,
Columbia University
Tao Li
,
University of Florida

Abstract

This paper studies mutual fund voting in proxy contests using a comprehensive sample of voting records over the period 2008 -- 2015, taking into account selective targeting by activists. We find that firm, fund, and event characteristics generate substantial heterogeneity among investors in their support for the dissident, including their reliance on proxy advisors. Notably, active funds
are significantly more pro-dissident than passive funds, and we uncover evidence consistent with a large unobserved fund ``inherent stance'' that cannot be explained by observable fund or event characteristics. In particular, we document a positive correlation between the propensity for targeting by activists and pro-activist voting by mutual funds, both based on the observables and unobservables. This finding suggests that a relatively pro-activist shareholder base is a key factor driving activists' selection of targets.

Passive Investors Are Passive Monitors

Davidson Heath
,
University of Utah
Daniele Macciocchi
,
University of Utah
Roni Michaely
,
Cornell University
Matthew Ringgenberg
,
University of Utah

Abstract

Passively managed index funds now own more than 25% of U.S. mutual fund and ETF assets. Using a new research design based on index reconstitutions, we study the governance implications of passive investing by directly examining the voice and exit mechanisms. We find that index funds are more likely to vote with a firm's management. Moreover, while they do regularly exit positions and omit holdings in their target benchmark, they do not use the exit mechanism to enforce good governance. Our results show that passive investing shifts power from investors to firm managers.

The Threat of Intervention

Vyacheslav (Slava) Fos
,
Boston College
Charles Kahn
,
University of Illinois

Abstract

We develop a model in which an activist shareholder can discipline management through intervention and through the threat of intervention. We show that the ex ante threat and ex post intervention can act as complements or substitutes. A weaker disciplinary role played by the intervention mechanism leads to lower firm value and more frequent ex post interventions. Thus, more frequent ex post interventions are not necessarily a sign of enhanced economic efficiency. Factors enhancing the power of the intervention may be less effective at improving economic efficiency than factors enhancing the ex ante threat. Because we endogenize the activist's choice of toehold, we also show that the effect of liquidity trading on firm efficiency depends on the timing of liquidity trading.

Institutional Investors and Corporate Governance: The Incentive to Be Engaged

Jonathan Lewellen
,
Dartmouth College
Katharina Lewellen
,
Dartmouth College

Abstract

This paper studies institutional investors’ incentives to be engaged shareholders. We measure incentives as the increase in an institution’s cash flow (management fees) when a stockholding increases 1% in value, considering both the direct effect on assets under management and the indirect effect on subsequent fund flows. By 2015, the average institution gains roughly $143,100 in annual cash flow if a firm in its portfolio rises 1%. The estimates range from $22,300 for small institutions (who hold relatively concentrated portfolios) to $335,900 for the largest institutions (with more diffuse holdings). Institutional shareholders in one firm often gain when rival firms in the industry do well, by virtue of the institution’s holdings in those firms, but the effects are modest in the most concentrated industries. Our estimates suggest that institutional investors often have strong incentives to be active shareholders.
Discussant(s)
Vicente Cunat
,
London School of Economics
Miriam Schwartz-Ziv
,
Michigan State University
Ernst Maug
,
University of Mannheim
Nadya Malenko
,
Boston College
JEL Classifications
  • G3 - Corporate Finance and Governance