Securities Lending 'No Barrier' to Shareholder Activism

Shareholder activism is alive and well, according to academics who have shown investors lending out equities will recall them in order to vote on company issues.

A paper by Reena Aggarwal from Georgetown University, Pedro Saffi from the University of Cambridge, and Jason Sturgess at DePaul University analyzed the trends shown by investors recalling stocks lent out to third parties.

“We find a marked reduction in the lendable supply prior to the proxy record date and an increase in borrowing demand and fees around the record date,” the authors wrote in a paper titled “The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market.”

The authors found five points of interest, each suggesting why investors were actively recalling their shares to give themselves—rather than the borrower of the security—the right to vote on a corporate event.

Firstly, the investor values this right, the paper claimed, and considers “the proxy process as an important channel for affecting corporate governance.” 

Secondly, the recall demand was not universal across a security, showing not all investors showed such commitment to corporate governance.

“Third, we show that the decision to recall shares on the voting record date also varies based on firm and proposal characteristics, which typically affect the value of control rights,” the authors said, adding that investors were more likely to recall shares when they felt the vote was of “importance.” This usually related to executive compensation, take-over threats, and corporate control.

The recall effect is almost 40% higher when there is an “important” decision to be made, according to the study, which added that firms with poor performance, weaker governance, and a relatively small market capitalization exhibited a higher recall of shares.

Fourthly, the authors created a metric that showed the owners of the shares were more concerned about the vote—or its outcome—than those who had borrowed them.

Finally, the paper found investors were more likely to recall shares when they were voting against management proposals than with them.

The study based its findings on anonymized data from pension funds, insurers, and other large financial institutions including mutual fund managers. While there was disparity in how and when they used their votes, the paper found there was little evidence to suggest fund managers voted with company management as a matter of course.

“Thus our results are consistent with shareholder voting acting as an effective governance mechanism, but only when the economic stake is large enough or economic benefit great enough to overcome the free-rider problem that arises from the dispersed ownership,” the paper concluded. “Overall, our findings imply that institutional investors value their vote and use the proxy voting process as an important channel for affecting corporate governance.”

The entire paper can be downloaded here.

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