Strategic voting and informational rents: evidence from mutual fund trades and votes

When shareholders play dual roles: traders and voters

The effective functioning of shareholder democracy requires that shareholders acquire information and vote sincerely based on that information, thereby allowing the aggregation of information and ensuring that voting outcomes reflect shareholders’ collective wisdom. However, unlike civic elections, where voting is often the only way for informed voters to derive utility from their private information, proxy voting allows informed voters to gain from both voting and trading shares, making these decisions interdependent. As a result, instead of always voting sincerely, informed shareholders may sometimes vote strategically against their private information to retain an informational advantage for post-vote trading. Such strategic voting behaviour, while in the private interest of informed shareholders, would undermine the effectiveness of proxy voting as a mechanism for aggregating information. Using a large sample of mutual fund trading and voting records at the intersection of transaction-level data from ANcerno and voting data from ISS Voting Analytics, our paper ‘Strategic Voting and Informational Rents: Evidence from Mutual Fund Trades and Votes’, examines strategic voting by informed shareholders and its implications for firms.

The trade-off between sincere and strategic voting

While sincere voting contributes to collective decision-making, it risks revealing costly private information through the aggregate vote tally. Consequently, informed shareholders may adopt a mixed strategy, sometimes voting strategically against their private signals to preserve the value of their information. This tactic is analogous to that of informed traders in market microstructure models, who occasionally trade against their private information to conceal it and profit (Huddart, Hughes and Levine, 2001; Yang and Zhu, 2020). Meirowitz and Pi (2022) formalise this trade-off, distinguishing between a vote’s pivotal effect on the policy outcome and its signalling effect on market prices. Specifically, when an informed shareholder employs a mixed strategy by occasionally voting against her private information, the market cannot infer her true signal with certainty, creating a temporary wedge between the shareholder’s private valuation and the market price that can be exploited through post-vote trading.

How we measure strategic and sincere voting

We identify 21 distinct voting behaviours based on a fund’s trading patterns immediately following a contentious shareholder vote:

• strategic voting is measured by the tendency to place contrary trades, that is buying shares after losing a vote and selling shares after winning one
• sincere voting is measured by the tendency to place aligned trades that is buying shares after winning a vote and selling shares after losing one

On average, we find that a fund engages in contrary trades 22.2% of the time, indicating a non-trivial likelihood of strategic voting. Similarly, an average fund engages in aligned trades 20.3% of the time.

Who is more likely to vote strategically?

In April 2022, RealT also launched the RealT Money Market (RMM). This lending platform allows investors to deposit their real estate tokens as collateral to borrow stablecoins, while retaining their claim on the rental income. During the first RMM version, only 53 selected real estate tokens were eligible as collateral. Following the launch of the updated version in February 2024, all available real estate tokens can be used as collateral. The time-varying borrowing and lending interest rates are determined by demand and supply in the pool, essentially by how much of the pool’s stablecoins, deposited by lenders as liquidity providers, are being borrowed by investors. When demand for loanable stablecoins increases, the borrowing interest rate rises. The lending rate adjusts accordingly as an incentive for potential lenders to deposit additional loanable stablecoins. When the pool has a large amount of loanable stablecoins but a limited number of borrowers, borrowing and lending rates decrease to attract more potential borrowers. Borrowers must maintain a 120% to 150% overcollateralized position of their deposited collaterals. When the collateral value declines, relative to the outstanding debt, borrowers either repay part of their debt or must deposit additional real tokens as collateral. When the collateral value falls below the threshold value, the loan can be liquidated by other investors (Heimbach and Huang, 2023).

Greater stock liquidity facilitates strategic voting Informed shareholders’ incentive to vote strategically rather than sincerely may increase with stock liquidity, as greater liquidity enables post-vote trading with minimal price impact. Consistent with this prediction, we find that strategic voters are more likely to place contrary trades after contentious votes in liquid stocks. In contrast, stock liquidity is not consistently significantly correlated with the likelihood of sincere voters engaging in aligned trades. These results indicate that greater stock liquidity increases the incentive and ability of informed shareholders to engage in strategic but not sincere voting, as it allows them to more effectively exploit their informational advantage through subsequent trading.

Post-vote trades and subsequent stock performance

If strategic voters possess private information about contentious proposals and exploit their informational advantage through trading after the votes, their post-vote trades should contain information about subsequent abnormal stock returns.  Consistent with this prediction, we find that net buying of strategic voting funds in an 11-day window starting from the shareholder meeting date positively predicts subsequent abnormal stock returns, especially over intermediate horizons of 6 to 9 months. The economic magnitude is large. For example, a one-standard-deviation increase in net buying of strategic voting funds is associated with an increase of 2.187% in the Fama-French-Carhart four-factor adjusted cumulative abnormal return (CAR) over a 6-month period following the trading window and the magnitude is roughly the same for longer holding horizons. In contrast, net buying of funds classified as sincere voters or those that are neither strategic nor sincere voters does not possess predictive power for abnormal stock returns. These results suggest that strategic voting funds possess information about contentious proposals and profit from this information through post-vote trading.

To shed light on the sources of strategic voters’ informational advantage, we investigate how the predictive power of strategic voters’ post-vote trades for subsequent stock performance varies with the extent to which they vote in the same direction. When strategic voters vote uniformly, they are likely to amplify the wedge between their private valuations and the market price, which in turn could allow them to extract higher informational rents through subsequent trades. We find that the predictive power of strategic voters’ post-vote net buying is significantly stronger when their votes are more aligned, suggesting that strategic voters are better able to extract informational rents when their voting behaviour is more synchronised.

The information content of strategic voters’ votes

We then examine the information content of strategic voters’ votes. Since strategic voters tend to vote against their private information for strategic reasons, their aggregate votes may contain information that is systematically inversely related to their private signals and hence, to future stock returns. For example, when strategic voters disproportionately vote against a contentious proposal, they likely possess favourable information about the proposal. Thus, the stock price should ultimately decrease when the proposal is rejected (such as when the vote outcome aligns with their strategic votes) and increase when it passes to reflect their favourable information. Consistent with this prediction, we find that strategic voters’ net win, such as the extent to which the vote outcome aligns with their votes, negatively predicts the abnormal stock return after contentious votes. This result indicates that strategic voters vote against their private information and that this information is ultimately reflected in the stock price.

Implications for corporate governance and regulators

While strategic voting can benefit informed shareholders, it comes at a cost to the effectiveness of shareholder democracy. Indeed, we find that strategic ownership, defined as the proportion of mutual fund ownership accounted for by strategic voting funds, negatively predicts return on assets (ROA) and standardised unexpected earnings based on analyst forecasts (SUE). These results provide suggestive evidence that strategic voting funds may adversely affect corporate performance by weakening the effectiveness of shareholders’ collective decision-making.

Our study has important implications for regulators. A well-functioning shareholder democracy requires that shareholders vote sincerely in alignment with their information, thereby ensuring that voting outcomes reflect shareholders’ collective wisdom. Our findings suggest that informed shareholders may at times vote strategically against their private information to preserve an informational edge for post-vote trading, which can weaken the effectiveness of proxy voting as an information aggregation mechanism. This tension between shareholders’ roles as both traders and voters is therefore of direct relevance to policymakers, indicating that assessments of the proxy system should account for how trading incentives and the pursuit of informational rents affect the informativeness of shareholder voting and, ultimately, the effectiveness of corporate governance.