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  5. Managers, Shareholder Preferences, and Voting
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Managers, Shareholder Preferences, and Voting

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 1 & 2
Hosted By: American Finance Association
  • Jonathan Karpoff, University of Washington

Managing Ownership by Management

Julian Franks
,
London Business School
Colin Mayer
,
University of Oxford
Hideaki Miyajima
,
Waseda University
Ryo Ogawa
,
Cambridge Universal College

Abstract

This paper provides a first analysis of a largely undocumented phenomenon of management creating firm value by managing the ownership of their own firms. It describes how firms in Japan purchase blocks of shares from insiders, hold them in treasury stock and sell them to strategic corporate investors. In the process, they address the Grossman Hart free-riding problem and its associated market failures by selling the shares at a discount, thereby allowing strategic buyers to capture some of the value they create. The paper shows that these management organized ownership transactions are on average value enhancing.

Custom Proxy Voting Advice

Edwin Hu
,
New York University
Nadya Malenko
,
Boston College
Jonathon Zytnick
,
Georgetown University

Abstract

This paper studies institutional investors’ decision-making using novel data from a major proxy advisor. We highlight the significant role of customized proxy advice in shaping shareholders’ voting decisions. About 80% of funds receive customized advice, and custom recommendations differ substantially from benchmark recommendations. We show that customization plays two key roles. First, it helps shareholders express their ideologies through the vote. Second, it facilitates shareholders’ decision-making process by reducing the need to pay attention to every proposal individually and enabling focus on the more important proposals. Customization thus influences both the aggregation of preferences and the aggregation of information in voting outcomes. Our findings offer a new perspective on the role of proxy advisors and suggest a shift away from solely focusing on benchmark recommendations.

The Politicization of Social Responsibility

Todd Gormley
,
Washington University-St. Louis
Manish Jha
,
Georgia State University
Meng Wang
,
Georgia State University

Abstract

Institutional investors are less likely to support shareholder proposals involving environmental and social issues for firms headquartered in Republican-led states. The lower support concentrates in recent years, when politicians became more vocal about firms’ social responsibility activities, and among larger institutions and firms, which tend to attract more attention from politicians. Investor support also shifts within states following changes in their leadership. Support for such proposals is 10 percentage points lower in the same state when it is led by Republicans instead of Democrats. The findings suggest that state-level politics and the politicization of an issue impacts institutional investors’ votes.

Political Preferences and Financial Market Equilibrium

Youchang Wu
,
University of Oregon
Josef Zechner
,
Vienna University of Economics and Business

Abstract

We present a model where firms choose a political stance and investors differ in political preferences. A firm’s political stance generates non-pecuniary payoffs that decrease in the distance between the firm’s political stance and investor political preferences. We show that heterogeneous political preferences endogenously lead to a polarization of corporate political stances and to risk sharing distortions. The deviations from optimal risk sharing increase in both the dispersion and the intensity of political preferences, and decrease in aggregate risk aversion. While value-maximizing corporate political stances lead to the utilitarian first-best outcomes in the competitive equilibrium when cash flows are uncorrelated across firms and unaffected by political stances, they are susceptible to influence by a political active large investor with significant price impact. If the cost of such influence activity is low, value maximization is welfare-dominated by a governance rule that requires corporate political stance to match the ownership-weighted average of shareholder preferences.

Discussant(s)
Randall Morck
,
University of Alberta
Elisabeth Kempf
,
Harvard University
Simi Kedia
,
Rutgers University
Luke Taylor
,
University of Pennsylvania
JEL Classifications
  • G3 - Corporate Finance and Governance