Institution-Broker Relationship and Mutual Fund Proxy Voting

We show that mutual funds are more likely to hold and significantly overweight stocks of their broker banks. Correspondingly, funds’ proxy voting is biased towards management of their brokers in contentious proposals. Such voting bias has a material impact on voting outcomes. In return, client mutual funds with greater portfolio overweighting and voting support receive larger allocations of underpriced IPOs from connected broker banks. Our study not only uncovers a new mechanism—being brokers’ friendly shareholders—through which the two parties maintain their quid pro quo relationships, it also raises a broader concern on shareholder monitoring of important financial institutions