Analyst Recommendations and Mutual Fund Voting : Evidence from Shareholder-Sponsored Corporate Governance Proposals

We study financial analysts’ recommendation when firms receive contentious shareholder-sponsored proposals on governance-related issues. We find that analysts’ stock recommendations in the month immediately prior to the annual meeting (at which shareholder voting on contested proxy proposals take place) are more pessimistic than recommendations issued in other periods, implying that analysts on average are dissatisfied with the target firm. However, we find that analysts issue more favorable stock recommendations when they are affiliated with a brokerage firm that has provided underwriting service to the target firms. We find that more negative analyst recommendations are associated with a higher level of voting support by mutual fund families for activist investors (i.e., voting for contentious corporate governance related shareholder, which are contested by the management but supported by the proxy advisory firm). This negative impact of analyst recommendations on mutual fund families’ voting support for activist is more pronounced for targeted firms when the fund family has a large ownership in the firm, firms with poorer performance (i.e., lower ROA) and weaker governance (i.e., duality of CEO and chairman role)