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Proxy Advisory Firms: The Economics of Selling Information to Voters
Author(s) -
MALENKO ANDREY,
MALENKO NADYA
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12779
Subject(s) - proxy (statistics) , voting , shareholder , private information retrieval , business , information asymmetry , actuarial science , economics , finance , computer science , politics , corporate governance , computer security , political science , machine learning , law
We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision‐making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects.