Political Partisanship, Mutual Fund Voting, and Corporate Governance

Description

Political party affiliation has become a salient social identity in the last two decades. As part of increasing political polarization, people tend to classify co-partisans as members of their in-group and opposing partisans as members of their out-group. The ensuing in-group favoritism and out-group hostility associated with political partisanships manifest themselves in myriad ways both in politics and in everyday life. This project aims to study the role of political partisanship in the asset management industry by examining whether and how mutual fund managers are politically motivated when voting on proxy voting proposals.We investigate whether mutual fund managers' voting behavior is affected by their political affinity with the CEOs of the portfolio firms. We identify the political partisanship of mutual fund managers and corporate CEOs by their personal campaign contributions to political candidates. We expect that political partisanship induces the fund manager to come to the CEO's help when such help is needed – i.e., especially in critical and contentious proxy proposals. We expect that such support is not driven by a "quid pro quo" that provides the fund manager with better performance in the form of a better information-based trading strategy, but due to the desire to aid a politically affine CEO. Given that such help is difficult to justify, we expect the politically motivated asset managers to engage in signal jamming when voting in non-contentious proposals.Given that out-group threats tend to enhance in-group favoritism, we expect to show that such voting behavior is amplified when the governing political party is of a different political color from the partisanship shared by the fund manager and the corporate CEO. Moreover, we expect such voting behavior to be more prominent when the firm is experiencing activist events such as Schedule 13D filings and securities class action litigations during which managementis especially in need of help, as well as in the presence of greater reputational concerns for fund managers – i.e., supporting CEOs of firms with worse ESG rankings.We further investigate how political affine funds affect the quality of corporate governance of the portfolio companies. We expect that, by distorting the voting incentives of mutual funds in proxy proposals, political affinity would reduce the effectiveness of shareholder monitoring and lead to unfavorable governance outcomes. We expect that the presence of political affine funds reduces acquisition announcement returns, lowers CEO turnover performance sensitivity, and leads to lower market valuations.