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E-MailAlon Brav is Robert L. Dickens Professor of Finance at Duke University Fuqua School of Business; Matthew D. Cain is a senior fellow at the University of California, Berkeley; and Jonathon Zytnick is a PhD candidate at Columbia University. This post is based on their recent paper.
A central premise of corporate governance research is the shareholder collective action problem. Shareholders, the ultimate economic beneficiaries of firms, are by commonly-accepted wisdom dispersed and rationally apathetic, unable to effectively monitor firms. Research tends to focus on those who are hired to act for shareholders’ ultimate economic benefit: the management and directors, and, in more recent decades, the institutional investors which have become the primary channels of investment for most individuals. Much of the research on retail shareholders in the finance literature has focused on their buying and selling decisions while there is little research on their voting decisions. The rise in the importance of corporate governance over the past several decades has brought with it a new focus on the role of institutions as monitors acting on behalf of their underlying investors. Little is known, however, about how retail shareholders monitor and communicate with the managements of their portfolio firms. While previous research has produced extensive empirical analysis on institutional investor (i.e. non-retail) voting, the question of how actual retail shareholders vote has not been addressed, mostly due to lack of data availability.
In our paper, we provide the first detailed empirical analysis of retail shareholder voting. We analyze a sample of U.S. retail shareholder voting data covering virtually all regular and special meetings during the three years 2015 to 2017. This data is anonymized at the voter level but allows us to track voters both across firms and over time. To our knowledge, ours is the first such study to explore retail shareholder voting behavior in detail. Retail domestic shareholder aggregate share ownership is sizeable, averaging 26% of shares outstanding. It averages close to 38% in firms in the smallest size quintile and declines to 16% in firms in the largest size quintile.
On the decision whether to cast a ballot, we find that retail shareholders cast 32% of their shares, on average, which is significantly lower than the 80% rate of participation by the entire shareholder base. In total, 12% of the average firm’s retail accounts choose to vote. Retail voter participation is higher among smaller firms. The decision to cast a ballot varies predictably with anticipated costs and benefits. It increases with stake size, when the company’s return on assets is poor, and when there are ISS-opposed proposals on the ballot. Turnout also decreases with ZIP code labor income, which we use as a proxy for opportunity cost of time spent on voting.
Conditional on the decision to vote, we find that retail and non-retail shareholders tend to provide similar overall support for management proposals. Retail shareholders, however, provide less support for shareholder proposals relative to the broader investor base. These unconditional support rates mask three important heterogeneities. First, retail shareholders at small firms are less (more) supportive of management (shareholder) proposals than they are at larger firms. Second, retail shareholders with a larger equity stake provide stronger (weaker) support for management (shareholder) proposals than smaller shareholders across all firm size sorts. Third, as discussed below, ISS recommendations in support of management and shareholder proposals have a much weaker association with retail voting than that for institutional investors.
Retail shareholders and institutional investors vote substantially differently. Retail shareholder support for management proposals is strongly related to lagged firm stock price performance, even with account-firm fixed effects, consistent with a focus on disciplining poorly-performing firms, whereas the voting of the Big Three institutional investors is not statistically significantly correlated with recent stock performance. On the other hand, ISS opposition is associated with a 35 percentage point decrease in Big Three support, but only a 5 percentage point decrease in retail shareholder support. Retail shareholders do not support environmental, social, and governance (ESG) proposals to the same degree as institutional investors. This is driven by the tendency of retail shareholders with large stake sizes, who participate more often, to vote against such proposals. We find that shareholders with smaller stake sizes, whose turnout rate is low, provide stronger support for ESG proposals when they choose to engage.
The evidence we present is consistent with the view that retail shareholders play a beneficial role in monitoring, and one that institutional investors may not perfectly replicate. Our results are also consistent with retail voters who weigh costs and expected benefits when choosing whether to cast a ballot. Our results also speak to the potential impact of measures to increase retail shareholder voting. Ultimately, we conclude that in contrast to the common caricature of retail shareholders as uninformed and apathetic, these investors can and do provide meaningful feedback to firms through the voting process.
The complete paper is available for download here.
