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Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

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  • Tao Li

    (Finance Group, Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom)

Abstract

Proxy advisory firms wield large influence with voting shareholders. However, conflicts of interest may arise when an advisor sells services to both investors and issuers. Using a unique data set on voting recommendations, I find that for most types of proposals, competition from a new entrant reduces favoritism toward management by an incumbent advisor that serves both corporations and investors. The results are not driven by factors that influence the entrant’s coverage decision, such as the marginal cost of new coverage or previously biased recommendations by the incumbent. Similar to other information intermediaries, biased advice by proxy advisors is shown to have real, negative consequences that allow management to enjoy greater private benefits. These results suggest conflicts of interest are a real concern in the proxy advisory industry, and increasing competition could help alleviate them.

Suggested Citation

  • Tao Li, 2018. "Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry," Management Science, INFORMS, vol. 64(6), pages 2951-2971, June.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:6:p:2951-2971
    DOI: 10.287/mnsc.2016.2652
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    2. Yonca Ertimur & Fabrizio Ferri & David Oesch, 2018. "Understanding Uncontested Director Elections," Management Science, INFORMS, vol. 64(7), pages 3400-3420, July.
    3. Dasgupta, Amil & Fos, Vyacheslav & Sautner, Zacharias, 2021. "Institutional investors and corporate governance," LSE Research Online Documents on Economics 112114, London School of Economics and Political Science, LSE Library.
    4. Li, Xuan, 2023. "Home bias in shareholder voting," Discussion Papers 2023/21, Norwegian School of Economics, Department of Business and Management Science.
    5. Bolton, Patrick & Li, Tao & Ravina, Enrichetta & Rosenthal, Howard, 2020. "Investor ideology," Journal of Financial Economics, Elsevier, vol. 137(2), pages 320-352.
    6. Miyachi, Hiroaki & Takeda, Fumiko, 2024. "Empirical study on voting results and proxy advisor recommendations in Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).
    7. Shu, Chong, 2024. "The proxy advisory industry: Influencing and being influenced," Journal of Financial Economics, Elsevier, vol. 154(C).
    8. Paul M. Guest & Marco Nerino, 2019. "Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services," Working Papers wp515, Centre for Business Research, University of Cambridge.

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