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

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

Management Science, 2018, vol. 64, issue 6, 2951-2971

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.

Keywords: proxy advisory firms; corporate governance; conflicts of interest; competition (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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