The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/4.4.4:4.4.4 Portfolio Firm Performance

The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/4.4.4

4.4.4 Portfolio Firm Performance

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Previous studies have also shown that firm performance affects voting behaviour. Ashraf & Jayaraman (2006), for example, observe that the support for shareholder proposals is higher for firms in a lowest performance' portfolio than for firms in a `highest performance' portfolio. We hypothesize that funds deviate from their proxy advisor 's recommendation more often as firm performance decreases, since decreasing performance calls for increased monitory activity to preserve the value of the fund's investment and protect portfolio performance. The results reported in Table 4 (Panel A) are consistent with this. If we rank portfolio firms by market adjusted performance, we see that the median rate of deviation for firms that are performing poorly compared to other portfolio firms (lower quartile) is 1.9%, while the rate of deviation for firms that are performing relatively well is only 1.1%.

Figure 4: Propensity to deviate and firm performance (median fund)

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Consistent with this, for the full sample of voting decisions (Panel C), the rate of deviation from proxy voting recommendations in respect of firms that are performing relatively poorly is 7.1%, while the rate for firms that are performing relatively well is only 5.6%. The difference between the means is statistically significant (p-value< 1%).1

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