On Investors' Ownership and Voting Decisions: Evidence from Mutual Funds

Abstract

Investors are supposed to have greater incentive to vote responsibly when they hold large number of shares in a firm. However, using mutual fund voting records, we find that when funds hold more shares, they become more likely to vote for management, even when proposals may be damaging to shareholders. This phenomenon is particularly strong when the proposals concern director election and management compensation. After rejecting several alternative explanations, we propose that this apparently contradictory behavior is consistent with funds' optimal monitoring strategies. Funds with substantial ownership stakes will vote strategically for management to facilitate their private monitoring activities. Consistent with this hypothesis, further evidence suggests that the presence of funds with substantial ownership reduce potentially detrimental management-sponsored proposals.

Keywords: Mutual Fund, Proxy Voting, Ownership Structure, Corporate Governance

JEL Classification: G23, G34