Do Institutional Investors Monitor their Large vs. Small Investments Differently? Evidence from the Say-On-Pay Vote

We consider institutional voting on Say-On-Pay as a function of the size of an institution's position. Smaller positions, measured either as percent of a firm held or portfolio weight invested in a firm, lead to lower support of management in SOP voting, consistent with small-scale investors having limited incentives and opportunity to participate in governance through alternative venues. This result is largest when the firm has significant blockholder presence, and holds independent of ISS recommendations. We also find that the size of investment at the institutional advisor level, rather than the fund level, better predicts voting. Hence, in companies with a dispersed shareholder structure, the SOP vote is particularly likely to be used to oppose management. To summarize, we find that, when a low-cost monitoring opportunity is made available, small institutional positions, which aggregate to a large level of ownership across institutions, can play a meaningful role in corporate governance.

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