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  5. Shareholder Voting, ESG, and Institutional Investors
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Shareholder Voting, ESG, and Institutional Investors

Paper Session

Friday, Jan. 5, 2024 10:15 AM - 12:15 PM (CST)

Grand Hyatt, Travis C
Hosted By: Econometric Society
  • Chair: Enrichetta Ravina, Federal Reserve Bank of Chicago

Proxy Voting and the Rise of ESG

Patrick Bolton
,
Columbia University
Enrichetta Ravina
,
Federal Reserve Bank of Chicago
Howard L. Rosenthal
,
New York University
Chris Tausanovitch
,
University of California-Los Angeles

Abstract

We track the temporal pattern of institutional investors’ ideologies as revealed by their proxy votes from 2005 to 2018. Despite the financial crisis, the regulatory changes on proxy voting and the transformation of the asset management industry it has spawned, and despite the rise of the socially responsible investment movement, we find that the ideology of the largest investors has remained highly stable. The ideologies of institutional investors are revealed by a dynamic, spatial scaling analysis of all proxy votes of 561 mutual fund families. We characterize voting as driven by single-peaked preferences in a two-dimensional Euclidean space. One dimension reflects the familiar left-right ideological leanings, with more socially responsible investors on the left, and the other dimension differences in attitudes towards management, with management-friendly investors at one end and management disciplinarians at the other. Although the ideology of the largest investors remains solidly stable on average, we find that the ideologies of a substantial fraction of other investors evolve substantially over time.

Private Sanctions

Oliver D. Hart
,
Harvard University
David Thesmar
,
Massachusetts Institute of Technology
Luigi Zingales
,
University of Chicago

Abstract

We survey a representative sample of the U.S. population to understand stakeholders’ desire to see their firms leave Russia after the invasion of Ukraine. Only 37% of the respondents think that leaving Russia is a pure business decision, and only 30% think that sanctions are a pure matter for the government. If a firm does not conform to these desires, 66% of the respondents are willing to boycott it (exit). We randomize a (hypothetical) cost of exiting the firm. This cost has a strong effect on the stated propensity to exit. This sensitivity allows us to provide a natural $ equivalent of moral motivations for exiting. We try to distinguish deontological and consequentialist motives to exit, by randomizing beliefs about impact. We find a clear effect of impact for shareholders, but not for consumers and employees. Our results continue to hold on the subsample of participants who actually donate part of their survey compensation to Ukraine. In our survey, consumers emerge as the most powerful force to control the morality of firms. We discuss the geopolitical and economic implications of a world where private corporations can discontinue profitable business relationships for moral or political reasons.

Investor ESG Sentiment and Financial Markets

Reena Aggarwal
,
Georgetown University
Hoa Briscoe-Tran
,
University of Alberta
Isil Erel
,
Ohio State University
Laura Starks
,
University of Texas-Austin

Abstract

We decompose the public sentiment of individual firms into the financial and ESG components as well as into the news and social media sources. We propose that the number of shareholder proposals is an effective proxy for investor dissatisfaction with a firm’s practices. There exists a strong relationship between public sentiment, both financial and ESG, and the number of shareholder proposals submitted. These results are driven by both the news coverage and social media posts. Further, they occur for the public sentiment regarding the individual elements: environmental, social and governance. We provide evidence of causality through an instrumental variable analysis.

Corporate Governance in the Presence of Active and Passive Delegated Investment

Adrian Aycan Corum
,
Cornell University
Andrey Malenko
,
Boston College
Nadya Malenko
,
Boston College

Abstract

We examine the governance implications of passive fund growth. In our model, investors allocate capital between passive funds, active funds, and private savings, and funds’ fees and ownership stakes determine their incentives to engage in governance. If passive funds grow because of easier access to index investing, governance improves, albeit only up to a point where passive funds start primarily crowding out investors’ allocations to active funds rather than private savings. In contrast, if passive funds grow because of reduced opportunities for profitable active management, governance worsens. Our results reconcile conflicting evidence about the effects of passive ownership on governance.
JEL Classifications
  • G3 - Corporate Finance and Governance