Paper Analyses Proxy Voting Impact on Securities Lending

The analysis suggests policy makers should address several issues related to proxy voting, including the need for investors to learn about proxy items before the record date so that they can decide whether to lend their shares or not.
By Janet Du Chenne(59204)
An analysis of the securities lending market during voting season concludes institutional investors use this process as an important channel for affecting corporate governance.

The analysis suggests policy makers should address several issues related to proxy voting, including the need for investors to learn about proxy items before the record date so that they can decide whether to lend their shares or not.

An academic paper, produced by Georgetown University’s McDonough School of Business, Judge School of Business at the University of Cambridge and DePaul University’s Driehaus College of Business investigates the voting preferences of investors using the securities lending market and the extent to which investors use the proxy voting process to exercise their opinions.

Given that shares on loan cannot be voted on during record date, a study of data on lendable supply, shares on loan, and the associated borrowing fee for the period 2007-2009 finds a marked reduction in the lendable supply prior to the proxy record date and an increase in borrowing demand and -fees around the record date.

First, the paper’s results illustrate that institutional investors value the right to vote, revealing that they recall shares to retain voting rights and use the proxy process as an important channel for affecting corporate governance. It also finds that these investors do not all value their voting rights in the same way, with considerable heterogeneity in the preferences. It also proposes a metric to quantify the value of the vote and also show that share recall is associated with less support for management in the subsequent voting outcome. The heterogeneity in recall of shares shows that institutional investors systematically differ in their desire to exert governance via proxy voting.

The paper examines blockholdings in aggregate, since these investors should have the greatest incentive to intervene through the proxy process, and those held by four types of investors: mutual funds, banks and insurance companies, pensions and endowments, and long-term investors. Firms with poor performance, weaker governance, and smaller firms exhibit higher recall of shares on the record date. The paper finds that higher recall of lendable supply is associated with less support for management proposals, such as those relating to compensation and corporate control, and more support for shareholder proposals.

The paper says there are several reasons why examining recall in the lending market, as opposed to the borrowing fee, improves understanding about institutional investor voting preferences. The supply of lendable shares is essentially flat in the equity lending market, says the paper, which documents that this market clears with high levels of slack lendable supply for the average firm. One of the paper’s major contributions is to show that it is important to analyze both the lendable supply and the loan demand side of the market.

Just prior to the proxy record date, we find a significant reduction in lendable supply, because institutions restrict or call back their loaned shares in order to vote. These results show that recall is higher for firms with a higher proportion of investors with stronger incentives to monitor and exert governance, for stocks where governance is more valuable and for proposals where the returns to governance are likely higher.

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