City Research Online

Frenemies: how do financial firms vote on their own kind?

Keswani, A., Stolin, D. and Tran, A. (2016). Frenemies: how do financial firms vote on their own kind?. Management Science, doi: 10.1287/mnsc.2015.2314

Abstract

The financial sector is unique in being largely self-governed: the majority of financial firms’ shares are held by other financial institutions. This raises the possibility that monitoring of financial firms is especially undermined by conflicts of interest due to personal and professional links between these firms and their shareholders. To investigate this possibility, we scrutinize the aspect of the financial sector’s self-governance that is directly observable: mutual fund companies’ voting of their peers’ stock. We find that considerations specific to investee firms’ membership in the same industry as their investors do indeed impact voting. This impact is in the direction of supporting the investee’s management. We show that the own-industry effect reduces director efficacy and lowers firm value as a result. We extend our analysis to other financial companies and show that they also tend to vote more favorably when it comes to their peers. Our results suggest that peer support is a corrupting factor in the financial sector’s governance.

Publication Type: Article
Publisher Keywords: Information And Computing Sciences, Commerce, Management, Tourism And Services
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/12688
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