Abstract: This paper provides a first analysis of a largely undocumented phenomenon of management creating firm value by managing the ownership of their own firms. It describes how firms in Japan purchase blocks of shares from insiders, hold them in treasury stock and sell them to strategic corporate investors. In the process, they address the Grossman Hart free-riding problem and its associated market failures by selling the shares at a discount, thereby allowing strategic buyers to capture some of the value they create. The paper shows that these management organized ownership transactions are on average value enhancing.
Abstract: This paper studies institutional investors’ decision-making using novel data from a major proxy advisor. We highlight the significant role of customized proxy advice in shaping shareholders’ voting decisions. About 80% of funds receive customized advice, and custom recommendations differ substantially from benchmark recommendations. We show that customization plays two key roles. First, it helps shareholders express their ideologies through the vote. Second, it facilitates shareholders’ decision-making process by reducing the need to pay attention to every proposal individually and enabling focus on the more important proposals. Customization thus influences both the aggregation of preferences and the aggregation of information in voting outcomes. Our findings offer a new perspective on the role of proxy advisors and suggest a shift away from solely focusing on benchmark recommendations.
Abstract: Institutional investors are less likely to support shareholder proposals involving environmental and social issues for firms headquartered in Republican-led states. The lower support concentrates in recent years, when politicians became more vocal about firms’ social responsibility activities, and among larger institutions and firms, which tend to attract more attention from politicians. Investor support also shifts within states following changes in their leadership. Support for such proposals is 10 percentage points lower in the same state when it is led by Republicans instead of Democrats. The findings suggest that state-level politics and the politicization of an issue impacts institutional investors’ votes.
Josef Zechner, Vienna University of Economics and Business
Abstract: We present a model with conflicting political preferences among investors. We show that heterogeneous political preferences endogenously lead to polarized corporate political stances and partisanship in portfolio holdings. Expected stock returns of partisan firms are lower than those of politically neutral firms in a competitive equilibrium, and the return gap is amplified if corporate partisanship reduces expected cash flows, and mitigated if centrist investors grow in influence. While value-maximizing corporate political stances maximize aggregate welfare under certain conditions, they impose disutilities on dissenting investors and are susceptible
to influence by a politically active large investor. If the cost of such influence activity is low, protecting small shareholders by requiring corporate political stance to match the ownership-weighted average of shareholder preferences can increase aggregate welfare.
Discussant: Luke Taylor, University of Pennsylvania
