4.4.2 Size of Stake

The higher the market value of the stake in the portfolio firm, the greater the impact of the portfolio firm's performance on the performance of the fund's portfolio. Accordingly, we hypothesize that the higher the market value of the stake in the portfolio firm, the more resources the fund devotes to verifying the accuracy of the voting recommendation, and the greater the likelihood (at the margin) that the fund reaches a different conclusion than its proxy advisor. The results reported in Table 2 (Panel A) and visualized below are consistent with this hypothesis. The median fund deviates from proxy voting recommendations with respect to firms in the upper quartile (in which it holds a stake with a high value compared to the stakes it holds in other portfolio firms) 2.2% of the time, versus 1.6% of the time with respect to firms in the lower quartile.

Previous studies have found that the size of the stake in the portfolio firm (expressed as a percentage of the number of outstanding shares) affects funds' voting behaviour (see e.g. Morgan et al. 2011). Of course, the larger the size of the stake in the firm, the larger the fund's influence on the outcome of the vote. Therefore we also hypothesize that the higher the percentage of shares held, the more resources the fund devotes to verifying the accuracy of the voting recommendation, and the greater the likelihood (at the margin) that the fund reaches a different conclusion than its proxy advisor. The results reported in Table 2 (Panel A) and visualized below are consistent with this. If we rank the portfolio firms by the size of the fund's stake in each firm, we see that the median fund deviates from proxy voting recommendations with respect to firms in the upper quartile (in which it holds a large stake compared to the stakes it holds in other portfolio firms) 2.2% of the time, versus 1.7% of the time with respect to firms in the lower quartile.

If we look at the full sample of voting decisions (Panel C), we see that on average, the funds tend to deviate more often when their stake is relatively large than when it is relatively small, and that they deviate more often when their stake has a relatively high market value than when it has a relatively low market value. In each case, the difference between the means is statistically significant (p-value<1%). These results are thus consistent with the results obtained for the median fund.

Overall, while we cannot assess causality, these results do constitute initial evidence that value and size of stake are likely to influence funds' decision on the amount of resources to invest in verifying the accuracy of their proxy advisors' voting recommendation. After all, the reverse causality story would be that funds invest an equal amount of resources and that the accuracy of proxy voting recommendations (and consequently the rate of deviation) varies depending on the value and size of stake held by the fund in the portfolio firm, which is unlikely.