PhD seminar with Tove Forsbacka

Title: How do common owners coordinate - is it the proxy advise industry?

Abstract:
High levels of common ownership across competing firms may lower their incentives to compete. The empirical relevance of this concern hinges on the ability of common owners to coordinate in softening product market competition. Most institutional investors effectively outsource shareholder voting to proxy advisors and this paper examines the role of proxy advisors in such coordination. The proxy advise industry is dominated by a single advisor, Institutional Shareholder Services (ISS), who gives voting recommendations to 70% of all institutional investors. In a conceptual framework, I show that a proxy advisor maximizing client value will promote softer competition for commonly held firms. Combining data on ownership and shareholder meetings for all publicly listed U.S. firms (2003-2017), I find that ISS gives voting recommendations that lower competition for firms with more common ownership. In particular, for a firm with higher common ownership, ISS is more likely to i) support mergers, ii) oppose managerial incentive contracts that enhances performance-sensitivity, and iii) support director interlocks.