Reena Aggarwal, Professor of Finance at Georgetown University; Pedro Saffi of the Finance Department at the University of Navarra; and Jason Sturgess, Assistant Professor of Finance at Georgetown University recently published a paper examining whether proxy voting affects the supply or demand for securities lending. The paper surveys the US securities lending market from 2005 and 2009, a period of tremendous growth, using a proprietary data set consisting of the inventory of shares available to lend, the shares borrowed, and loan fees.
The paper examines institutional investors's role in the voting process by analyzing the supply of lendable shares proximate to the time of a proxy vote. The paper finds that, near the time of a proxy vote, there is a marked reduction in supply of lendable shares because institutions restrict or call back their loaned shares prior to a vote. The professors posit that this reduction in securities lending activity by institutions proximate to a proxy vote is direct evidence that the institutions are playing a role in the voting process in order to bring about changes at companies. The analysys of the 2005 to 2009 period also reveals that the reduction of the supply of lendable shares is most pronounced in cases for which RiskMetrics and ISS, the predominant proxy advisory firms, recommend voting against the proposal, further indicating that institutions restrict the supply and recall shares already on loan in order to vote on important proxy agenda items.
The paper also considers concerns about "empty voting" by examining the changes in borrowing demand around the time of a vote. Empty voting is a generic term referring to circumstances that result in a partial and often total separation of the right to vote at a shareholders' meeting from beneficial ownership of the shares on the meeting date. This separation often happens when there is a large market in borrowing and lending shares for a variety of purposes, including for short sales and for hedging transactions. Empty voting potentially can be employed by hedge funds or other activist investors to create a large voting position at a relatively small cost and virtually no market exposure by borrowing shares immediately prior to a record date and repaying the shares immediately after the record date. Though the analysis suggests that there is some evidence of increased demand around the time of the record date, the increase in demand is economically small compared to the sharp reduction in supply. Most of the increase in loan fee around the time of a vote is associated with reduced supply, which is related to the desire of institutions to vote their shares. The paper concludes that empty voting during the period of study was not statistically significant.
The full text of the paper is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1688993