Proxy favors: Confidential proxy voting with institutional dual holders

Abstract

Research Question/Issue

For firms with institutional dual holders, is proxy voting affected by whether the vote is confidential? Does confidential voting affect firms' cost of debt?

Research Findings/Insights

Consistent with social exchange theory and reciprocity norms, we find that, in the absence of confidential voting, firms with institutional dual holders gain more favorable votes for proposals and, in particular, for management-sponsored compensation proposals. Further, these firms pay a higher cost of borrowing. This reciprocity relation does not exist if the firm has confidential voting in place.

Theoretical/Academic Implications

The results are consistent with reciprocity norms creating a psychological obligation to repay valuable favors between firm managers and institutional dual holders when proxy votes are not confidential.

Practitioner/Policy Implications

The findings support the popular position that confidential voting is in the best interests of shareholders and rigorous external corporate governance.