Andrey Malenko, Nadya Malenko - December 13, 2016
Proxy advisors play an important role by providing investors with research and recommendations on how to vote their shares. This paper examines how proxy advisors affect the quality of corporate decision-making. We analyze a model in which a monopolistic advisor offers to sell information to shareholders, who decide whether to acquire private information and/or buy the advisor's recommendation, and how to cast their votes. We show that the proxy advisor's presence can decrease the quality of decision-making, even if its information is more precise than shareholders' information and no party has a conflict of interest. This is because there is a wedge between privately optimal and socially optimal information acquisition decisions, leading to inefficient crowding out of private information production. We also evaluate several existing proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or increasing the transparency of their methodologies, can have a negative effect.