The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design

Proxy advisory …rms have become important players in corporate governance, but the extent of their in‡uence over shareholder votes is debated. We estimate the e¤ect of Institutional Shareholder Services (ISS) recommendations on voting outcomes by exploiting exogenous variation in ISS recommendations generated by a cuto¤ rule in ISS voting guidelines. Using a regression discontinuity design, we …nd that a negative ISS recommendation on a say-on-pay proposal leads to a 25 percentage point reduction in voting support for the proposal, suggesting strong in‡uence over shareholder votes. We also use our setting to examine the informational role of ISS recommendations. Keywords: proxy advisors, ISS, proxy voting, shareholder activism, regression discontinuity, say-on-pay, executive compensation JEL Classi…cation Numbers: G34, D72, J33 The authors are from the Carroll School of Management at Boston College, Finance Department. We are grateful to Bernard Black, Sudheer Chava, Alan Crane (discussant), Fabrizio Ferri (discussant), Cesare Fracassi, Mariassunta Giannetti, Amy Hutton, Dirk Jenter, Oguzhan Karakas, Darren Kisgen, Camelia Kuhnen, Doron Levit, Michelle Lowry, Andrey Malenko, Gregor Matvos (discussant), Jordan Nickerson, Je¤rey Ponti¤, Jonathan Reuter, Miriam Schwartz-Ziv, Philip Strahan, Jerome Taillard, Eric Zitzewitz (discussant), participants at the 2015 Texas Finance Festival, the 2015 Ohio State University Corporate Finance Conference, the 2015 SFS Finance Cavalcade, the 2015 University of Oregon Summer Finance Conference, and seminar participants at Boston College, McGill University, University of California, Davis, and University of Pennsylvania for helpful comments and discussions. We are also grateful to Fabrizio Ferri for providing us with the data and to Jun Crystal Yang and Pouyan Foroughi for research assistance. Email: [email protected], [email protected].