Peer Effects in Proxy Voting Decisions

Proxy voting decisions are characterized by strong strategic complementary relationships in the sense that the utility to a shareholder from voting in a particular manner increases with the extent that other shareholders vote in the same manner. Such complementarities arise because the likelihood that the vote outcome goes in a certain direction depends on the fraction of shareholders that vote in that direction. Shareholders thus have an incentive to condition their votes on those of their peers to make their aggregate votes count more. By coordinating their voting behavior, individual institutions can increase the likelihood that the outcome of the … Read more

How Institutional Cross-Ownership Can Improve Corporate Governance

A corporation’s governance structure does not exist in a vacuum: It can impose externalities on other firms. The existing literature has argued that those externalities can arise because companies interact with each other through various types of relationships. For example, according to Acharya and Volpin (2010), firms compete against each other in the managerial labor market. When a firm’s competitors adopt a low level of governance (e.g., by appointing a weak board of directors) and thus allow their managers to extract large benefits for themselves, the firm’s managers have an incentive to join those competitors, which in turn forces the … Read more