Nadya Malenko is an Assistant Professor of Finance at Boston College Carroll School of Management. This post is based on a forthcoming article by Professor Malenko, and Yao Shen, Assistant Professor of Finance at Baruch College Zicklin School of Business.
In our article The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design, forthcoming in the Review of Financial Studies, we analyze the effect of Institutional Shareholder Services (ISS) recommendations on shareholder voting outcomes. Over time, regulators and market participants have become increasingly concerned with the influence proxy advisors allegedly have on investors’ votes and have pushed for stringent regulation of the proxy advisory industry. However, there is disagreement about whether the impact of proxy advisors’ recommendations is as strong as is sometimes claimed. On the one hand, concerns about ISS’s outsized influence are consistent with the strong positive correlation observed between ISS recommendations and voting outcomes. On the other hand, assessing the actual influence of ISS has been difficult because of the omitted variable problem: the same unobservable firm characteristics that lead ISS to give a negative recommendation can also lead shareholders to withdraw their support for the proposal, leading to an upward bias in the estimates of the ISS effect. Prior literature concludes that ISS recommendations move at least some fraction of the votes, but whether this fraction is large or small remains unclear. As a result, many observers believe that the influence of proxy advisors is significantly overstated and that stringent regulation may do more harm than good.
