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Georgetown McDonough Research Casts Light on Investor Influence

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Do institutional investors have an impact on how companies bring about change? It is difficult to study if or how institutional investors influence corporate management because their interactions are mostly done behind closed doors. But in a time of increased shareholder activism, it is an increasingly important issue to understand.

Reena Aggarwal, professor of finance and McDonough Professor of Business Administration at Georgetown University’s McDonough School of Business, set out to examine “The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market,” resulting in a paper that won the Global Challenge for Innovation in Corporate Governance, held by BlackRock and the National Association of Corporate Directors (N.A.C.D.).

“Reena Aggarwal consistently raises the bar for professors who seek to transform scholarly research into knowledge that can inform the larger business community,” said David A. Thomas, dean of Georgetown’s McDonough School of Business. “Whether working in the boardroom or the classroom, Reena has a tremendous impact on current and future business leaders.”

Aggarwal and co-authors Pedro A.C. Saffi from the University of Cambridge, and Jason Sturgess from DePaul University, were honored at the N.A.C.D. Strategy & Risk Forum in San Diego, California. Together, they presented their findings to corporate directors, general counsel and business leaders from around the world. The paper is forthcoming in the Journal of Finance.

“Understanding institutional investor preferences regarding corporate governance is important for firms trying to retain and attract investors as well as policy makers considering the regulation of different governance mechanisms,” said Aggarwal, who also leads the school’s Center for Financial Markets and Policy.  

In the study, Aggarwal and her co-authors use the setting of the securities lending market to examine how institutional investors influence firm-level corporate governance through proxy voting. Investors must recall shares on loan in order to exercise their vote.

Their research found several insightful key findings:

  1. Institutional investors value the right to vote and therefore recall shares during the proxy voting period in order to retain their voting rights.
  2. Investors value the right to exercise their vote more at firms that have weak governance and/or weak performance.
  3. There is more interest in voting where the returns to governance are likely to be higher such as those relating to corporate control.
  4. Higher share recall is associated with less support for management and more support for shareholder proposals.

The authors conclude that institutional investors value their vote and use the proxy process as an important channel for affecting corporate governance.