Determinants and Consequences of Proxy Voting By Mutual Funds on Shareholder Proposals

Abstract

We analyze mutual funds' proxy voting records on shareholder proposals and investigate the following three issues. First, we study the determinants of mutual funds' voting policies across firms. Next, we examine the incentive structure of mutual funds that could act as a motivational force for them to undertake an activist role in their proxy voting behavior. Last, we investigate the trading behavior of mutual funds surrounding proposal meeting date and voting record release date and investigate whether mutual funds engage in "Wall Street Walk," that is, sell off their shares when dissatisfied with firms' management. Our results indicate that mutual funds support shareholder proposals and vote against management for proposals that are likely to increase shareholders' wealth and rights, in firms with weaker external monitoring mechanisms and in firms with entrenched management. The level of insider voting rights and the internal governance mechanism through blockholder ownership also influence funds' voting decisions. Moreover, mutual funds' motivation to take on an activist role does not come from their ownership concentration, but rather from their long-term investment goal. The results further indicate that there is a positive reputational effect for the funds undertaking a monitoring role in their voting strategies. The trading behavior of mutual funds suggests that funds reduce holdings when they disapprove of managements' policy, but before doing so they take on an activist role by supporting shareholder proposals.