Free-Riders and Underdogs: Participation in Corporate Voting

Voting outcomes can differ from underlying preferences due to strategic selection into voting. One explanation for such selection effects is lower participation of shareholders with popular preferences (free-rider effect) relative to those with unpopular preferences (underdog effect). We illustrate these effects in a rational choice model in which the voting participation decision depends on the probability of being pivotal and the costs and benefits of voting. Based on the model, we structurally estimate unobservable shareholder preferences. Using US data, we show that strategic selection into voting is relevant: 13% of voting outcomes in governance shareholder proposals represent only the minority.