DP16352 Creating controversy in proxy voting advice

Author(s):	Andrey Malenko, Nadya Malenko, Chester Spatt
Publication Date:	July 2021
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

The quality of proxy advisors' voting recommendations is important for policymakers and industry participants. We analyze the design of recommendations (available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. We show that even if all shareholders' interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations "create controversy" about the vote, increasing the probability that the outcome is close and raising each shareholder's willingness to pay for advice. In contrast, it serves the interest of the proxy advisor to make private research reports unbiased and precise. Our results help reinterpret empirical patterns of shareholders' voting behavior.