Which Firms Require More Governance? Evidence From Mutual Funds’ Revealed Preferences

Paper author: Irene Yi

This paper develops measures of mutual funds’ governance preferences to study whether funds prefer that certain companies strengthen shareholder rights relative to others. To this end, I examine the differences in fund votes across their portfolio firms’ proposals on a given issue and estimate funds’ preference rankings of firms by implementing the Metropolis-Hastings Markov chain Monte Carlo algorithm. Greater enthusiasm among funds does not always translate into higher vote support. Funds prefer firms with more agency issues to strengthen shareholder rights. Contrary to the view that the net benefits of takeover defenses are higher for young and small firms, funds are not enthusiastic about large and mature firms increasing shareholder rights. This paper provides novel evidence on fund preferences in the cross-section of companies and uncovers that funds demand more governance from some companies rather than voting in a “one-size-fits-all” manner.