Two essays on institutional investors

In the first essay, we study mutual funds' voting on compensation-related proposals initiated by corporate management. Compared with proposals on other topics, proposals on compensation issues are more likely to be challenged by mutual funds. Consistent with active institutional influence, mutual funds are more likely to vote against management at portfolio firms that make more excess CEO pay or depict other symptoms of poor governance such as bad performance and CEO entrenchment. Both active and passive funds' votes are significant drivers of the voting outcome of a proposal. Failed proposals are associated with lower CEO pay, especially excess pay, in the following year. Say-on-pay proposals opposed by more mutual funds are also followed by lower excess CEO pay. Collectively, evidence in this paper suggests that institutions (including passive institutions) play an important role in setting CEO pay through the voting channel.

The second essay examines the equity loan supply for short selling. Using detailed stock lending data, we show that active equity funds, on average, are informed, stock lenders. The stocks they lend outperform those that they do not. The stocks they recall and sell perform worse in the future than those that remain on loan. These funds avoid lending stocks when lending fees are extremely high and use the shorting market's signals to form stock-selling decisions. Our findings help explain why institutional investors lend stocks. They also highlight a new source of short-sale constraints arising from the informed loan supply.