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E-MailSophia Zhengzi Li is an assistant professor at Rutgers Business School and Miriam Schwartz-Ziv is an assistant professor at Michigan State University. This post is based on their recent paper.
In this paper we address several questions: Are shareholder votes a sufficient form of voice that catalyzes trades across the board? Are shareholders’ votes and trades correlated? And do shareholders update their trading patterns based on the information conveyed by other investors’ votes? We address these questions by examining the relation between votes and volume at the stock level, and the relation between mutual funds’ daily trades and their corresponding votes.
We first document that on the shareholder meeting date abnormal volume is equal to 19.4%, and that such large abnormal volume exists even around the dates of meeting that have only routine proposals on their agendas. This finding demonstrates that shareholder votes are associated with significant trading activity across the board. At the same time, we find that trading activity is particularly large on dates of particularly important meetings, e.g., meetings that involve a vote on a merger, or meetings at which at least one proposal resulted in an outcome contradicting management’s recommendation. We do not find a comparably clear spike in abnormal volume around the record date, the date the proxy statement is filed, the date ISS issues its recommendation, or the date the vote outcome is formally filed. These findings support the conclusion that, in most cases, information on the vote outcome is released on the day of the meeting, and it is the release of this information that is associated with large abnormal volume.
To further understand how votes and trades relate to each other, we explore this relation at the mutual fund level. To our knowledge, we are the first to directly examine how investors’ trades, both before and after the vote, relate to their own votes, and whether and how investors update their trading patterns once they observe the vote outcome. We find votes a particularly compelling setting for examining how investors trade before and after an event because the votes cast by an investor offer a proxy for the investor’s beliefs.
One might expect that, between the proxy filing and the meeting date, votes and trades will be positively correlated, because shareholders vote sincerely and their trades reflect their true opinion on the stock. However, it is also possible that shareholders vote strategically, meaning that shareholders do not simply vote in favor of proposals for which they have positive information and vice versa.
We find that mutual funds’ trades during the period between the proxy filing and the meeting date are indeed positively correlated: During this period, funds that vote against management on at least one proposal are more likely to decrease their holdings in the company than funds that vote in support of management on all proposals. We also investigate the relation between a fund’s say-on-pay votes and its trades, because the say-on-pay vote is frequently viewed as a general vote of confidence in management. Our findings demonstrate that between the proxy filing and the meeting date, funds that voted against management on the say-on-pay vote were more likely to decrease their holdings in the company, relative to companies for which they voted in support of say-on-pay. Taken together, these findings suggest that before the vote outcome is observed, mutual funds’ votes and trades are positively correlated, implying that mutual funds vote sincerely, and that their trades and votes complement each other.
We next demonstrate that funds update their trading patterns if the vote outcome contradicts the vote they cast. We find evidence demonstrating that shareholder votes can bring a shareholder to the realization that his opinion on which action the company should take are different from the opinions of most other shareholders, and that accelerates the shareholder’s exit. We find that if at least one vote outcome contradicts a vote cast by a fund, the fund is somewhat less likely to buy the stock and particularly more likely to sell the stock after the meeting, relative to the fund’s trades before the meeting for that same company.
We also show that a fund that votes against management on the say-on-pay vote, but then observes that management receives large support rates on the say-on-pay vote from other shareholders, is less likely to sell the stock after the shareholder meeting, relative to the fund’s trades before the meeting. Conversely, a fund that votes in favor of say-on-pay, but later observes low support rates for say-on-pay, is less likely to buy the stock after the meeting, relative to the fund’s trades before the meeting. Our evidence suggests that funds garner information (in our case: about the quality of management) from the vote outcome, and adjust their trading patterns in the direction of the vote outcome once they observe it.
Taken together, the fund-level analysis suggests that funds learn from the vote outcome both about whether the fund’s opinion on actions the company is considering is consistent with the opinion of other shareholders, and also about the quality of management. Both of these pieces of information catalyze a fund to update its trading patterns after the meeting.
The complete paper is available for download here.
