Please rotate your device to landscape mode to view the charts.

The Party Structure of Mutual Funds

Journal: Review of Financial Studies

Date: 20220601

Author: Bubb, Ryan; Catan, Emiliano M.

Abstract:
We investigate the structure of mutual funds' corporate governance preferences as revealed by how they vote their shares in portfolio companies. We apply unsupervised learning tools from the machine learning literature to analyze mutual funds' votes and find that a parsimonious two-dimensional model can explain the bulk of mutual fund voting. The dimensions capture competing visions of corporate governance and are related to the leading proxy advisors' recommendations. Cluster analysis shows that mutual funds are organized into three "parties"--the Traditional Governance Party, Shareholder Reform Party, and Shareholder Protest Party--that follow distinctive philosophies of corporate governance and shareholders' role.

Link: Google Scholar

Background and Context

Research Scope

Analysis of mutual funds' votes on 181,951 proposals from 5,774 portfolio companies by 4,656 mutual funds during 2010-2015, examining how they exercise corporate governance through voting.

Methodology

Using machine learning techniques to analyze voting patterns and identify key dimensions of mutual fund preferences in corporate governance decisions.

Data Coverage

Sample represents about 80% of the value of U.S. common stock held by domestic equity and balanced funds, providing comprehensive insight into institutional investor voting behavior.

Three Distinct Voting Patterns Among Mutual Fund Parties

  • Traditional Governance Party represents the largest share of assets at 66%
  • Shareholder Reform and Protest parties each represent roughly 6-7% of assets
  • Size differences reflect the concentration of major passive fund managers in Traditional Governance Party

Party Voting Patterns on Key Governance Issues

  • Traditional Governance Party shows moderate opposition on fundamental rights issues
  • Shareholder Reform Party demonstrates highest consistency in voting
  • Shareholder Protest Party shows strongest opposition on board supervision matters

Proxy Advisor Influence on Party Voting Decisions

  • Shareholder Reform Party shows highest reliance on proxy advisors at 41%
  • Traditional Governance Party demonstrates lowest compliance approach at 6.5%
  • Reveals varying degrees of independence in voting decisions across parties

Party Influence on Management Proposal Outcomes

  • Traditional Governance Party has substantial influence on management victories
  • Reform and Protest parties together significantly impact management defeats
  • Demonstrates the crucial role of each party in determining voting outcomes

Contribution and Implications

  • Reveals systematic structure in mutual fund voting behavior through identification of three distinct voting parties
  • Demonstrates how fund characteristics and incentives influence their approach to corporate governance
  • Provides insights into the role of proxy advisors and compliance approaches in shaping voting decisions

Data Sources

  • Party size visualization based on Table 10 fund characteristics data
  • Voting patterns chart constructed from Table 4 voting fraction data
  • Proxy advisor influence visualization derived from Table 10 compliance approach statistics
  • Party influence chart based on Table 7 voting outcome data
  • All visualizations use data from the 2010-2015 sample period analyzed in the paper