4.4.5.1 Information Cost

We expect that the more information available, the lower the costs for the fund to verify the accuracy of the voting recommendation, and the more likely the fund will be to conduct a verification exercise and reach a different conclusion than the proxy advisor. A useful proxy for the quality of the information environment is firm size, since larger firms have greater analyst following, receive more media coverage, etc. Thus, we hypothesize that all else being equal, funds deviate from proxy voting recommendations more often as firm size increases. The results reported in Table 4 (Panel B) and visualized below are consistent with this hypothesis. If we rank portfolio firms by size (i.e., market capitalization) the median rate of deviation from proxy voting recommendations with respect to portfolio firms in the upper quartile is 2.5%, whereas it is only 1.3% with respect to firms in the lower quartile.

An alternative explanation for this result is that it is driven by the stake size variable. Larger firms are likely to weigh heavier in the index, and to the extent the funds' portfolios mirror the index, they will hold larger stakes (or, more precisely, stakes with a higher market value) in such firms. As we have seen in section 4.4.2 above, funds tend to deviate from their proxy advisors' voting recommendations more often when they hold larger stakes.

Whatever the explanation, if we look at the individual fund level (Panel B), the results are not consistent. Also, for the full sample of voting decisions (Panel C), we obtain a different result. Here, the average deviation rate is 6.7% for the lower quartile versus 5.9% for the upper quartile. Given these inconsistencies, we cannot say that the data supports the hypothesis that funds tend to deviate more often as firm size increases. A likely explanation for this is that the proxy advisor has access to the same information as the fund does, so the fact that more information becomes publicly available does not put the fund in a better position vis-à-vis the proxy advisor in terras of analyzing how the fund should vote.