The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market
Reena Aggarwal, Georgetown University
Pedro A. C. Saffi, University of Cambridge
Jason Sturgess, DePaul University

Using the unique setting of the securities lending market, the authors find that institutional investors restrict lending supply and/or call back loaned shares prior to the record date to exercise their voting right. Loan demand and the price of borrowing also increase around the proxy voting record date. They estimate the value of voting rights by institutional investors in a simultaneous equation framework and show that lenders of shares value their shares more than borrowers. Institutions place a greater value on voting rights for firms with weak corporate governance, poor performance, and higher institutional ownership. The value of the vote also is higher when contentious proposals such as non-routine and those related to compensation, anti-takeover, and corporate control are on the ballot. Examining the subsequent vote outcome, the authors find higher recall to be associated with less support for management and more support for shareholder proposals. These results indicate that institutional investors value their vote and use the proxy process as an important channel for affecting corporate governance.This project explores what factors relating to both forecasting the empirical distribution of future returns and the risk neutralization process go into the market’s risk neutral volatility parameter. Daily risk neutral densities are extracted from S&P 500 index options from 1996-2011 using a model-free procedure. Both risk neutral volatility and realized volatility from the observation date through option expiration are computed to compare the sensitivity of the two volatility measures to a wide range of variables relating to different manifestations of volatility, such as tail risk, and to the risk neutralization process, such as the general level of consumer confidence and the size of recent volatility forecast errors.

Institutional managers who have lent shares that they want to vote must recall those shares. The security lending market thus can provide information about the demand to vote shares. This study examines the determinants of that demand. The results should interest managers, sponsors, and corporate executives who are involved in corporate governance issues as well as short sellers who want to maintain positions during a vote, or who need to predict how costly borrowing will be during various votes.