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

52 Pages Posted: 13 Mar 2007

See all articles by Rasha Ashraf

Rasha Ashraf

Georgia State University - Department of Finance

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business

Date Written: February 2007

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.

Keywords: proxy voting, mutual funds, corporate governance

JEL Classification: G23, G34

Suggested Citation

Ashraf, Rasha and Jayaraman, Narayanan, Determinants and Consequences of Proxy Voting by Mutual Funds on Shareholder Proposals (February 2007). Available at SSRN: https://ssrn.com/abstract=962126 or http://dx.doi.org/10.2139/ssrn.962126

Rasha Ashraf (Contact Author)

Georgia State University - Department of Finance ( email )

35 Broad Street
Suite 1238
Atlanta, GA 30303
United States
404-413-7348 (Phone)
404-894-6030 (Fax)

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4389 (Phone)
404-894-6030 (Fax)

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