October

Strategic Voting and Informational Rents: Evidence from Mutual Fund Trades and Votes

By Shaoting Pi, Former CERF Post Doc and Runner Up of the CERFAS Best Paper Award 2025

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 behavior, 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) formalize this trade-off, distinguishing between a vote’s pivotal effect on the policy outcome and its signaling 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 two distinct voting behaviors based on a fund’s trading patterns immediately following a contentious shareholder vote.

• Strategic voting is measured by the tendency to place “contrary trades,” i.e., buying shares after losing a vote and selling shares after winning one.
• Sincere voting is measured by the tendency to place “aligned trades,” i.e., 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 nontrivial likelihood of strategic voting. Similarly, an average fund engages in aligned trades 20.3% of the time.

Who Is More Likely to Vote Strategically?

Not all funds behave the same. In particular, funds with a higher portfolio turnover rate are associated with a greater extent of strategic voting behavior, suggesting that funds engaging in more active trading are more likely to vote strategically to profit from their private information through trading. Also, the expense ratio is a positive and significant predictor of strategic voting, suggesting that funds with higher expense ratios, which can afford the information acquisition costs necessary to become informed and likely possess superior managerial skills, are more inclined to use this strategy to capitalize on their informational advantage. Interestingly, these two fund characteristics do not significantly predict funds’ sincere voting behavior.

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 percentage points 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 behavior is more synchronized.

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 favorable information about the proposal. Thus, the stock price should ultimately decrease when the proposal is rejected (i.e., when the vote outcome aligns with their strategic votes) and increase when it passes to reflect their favorable information. Consistent with this prediction, we find that strategic voters’ net win, i.e., 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 standardized 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.