Outsourcing Shareholder Voting to Proxy Advisory Firms

Authors

David F. LarckerFollow
Allan L. McCallFollow
Gaizka OrmazabalFollow

Start Page

173

Abstract

This paper examines the economic consequences of institutional investors outsourcing research and voting decisions in public company elections to proxy advisory firms. We investigate the implications of these decisions in the context of shareholder say-on-pay voting required in 2011 under the Dodd-Frank Act. We find three primary results: proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes, a substantial number of firms change their compensation programs in the time period before formal shareholder votes in a manner consistent with the features known to be favored by proxy advisory firms in an effort to avoid negative voting recommendations, and the stock market reaction to these compensation program changes is statistically negative. These results suggest that outsourcing voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.

Recommended Citation

Larcker, David F.; McCall, Allan L.; and Ormazabal, Gaizka (2015) "Outsourcing Shareholder Voting to Proxy Advisory Firms," Journal of Law and Economics: Vol. 58: No. 1, Article 6.
Available at: https://chicagounbound.uchicago.edu/jle/vol58/iss1/6