DP16352 Creating controversy in proxy voting advice

Author(s): Andrey Malenko, Nadya Malenko, Chester Spatt
Publication Date: July 2021
Date Revised: May 2022
Keyword(s): Bayesian persuasion, bias, controversy, corporate governance, information design, proxy advisor, sale of information, voting
JEL(s): D72, D82, D83, G34, K22
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16352

We analyze the design of recommendations (available to all shareholders) and research reports (available only to subscribers) by a proxy advisor, who maximizes profits from selling information to shareholders. We show that the advisor benefits from biasing its recommendations against the a priori more likely alternative, thereby "creating controversy" for the vote. In contrast, it serves the advisor's interest to produce precise and unbiased research reports. Our results help reinterpret empirical patterns of shareholders' voting behavior, suggesting that proxy advisors' recommendations may not be a suitable benchmark for evaluating shareholders' votes. Our model also rationalizes the one-size-fits-all approach in recommendations.