Proxy Advisory Firms: The Economics of Selling Information to Voters∗

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 insuffi cient 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 suffi ciently 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. ∗Andrey Malenko: [email protected]. Nadya Malenko: [email protected]. We thank Rui Albuquerque, Alessandro Bonatti, Guojun Chen, Jonathan Cohn, Douglas Diamond, Daniel Ferreira, Thierry Foucault, Itay Goldstein, Leonard Kostovetsky, Doron Levit, Richmond Mathews, Jonathan Reuter, Suresh Sundaresan, Bilge Yilmaz, participants of the Maryland Junior Corporate Finance Conference, FTG and the Brevan Howard Centre Conference at Imperial College, NTU Finance Conference, Red Rock Finance Conference, Credit Ratings Conference at Carnegie Mellon University, Colorado Finance Summit, 7th UNCDuke Corporate Finance Conference, Northeastern University Finance Conference, 2017 WFA meeting, 2017 EFA meeting, and seminar participants at Bentley University, Boston College, Frankfurt School of Finance and Management, Harvard University, MIT, New York University, University of Houston, University of Mannheim, University of Washington, and U.S. Securities and Exchange Commission for helpful comments.