Shareholder Votes and Proxy Advisors: Evidence from Say on Pay

We investigate the effect of proxy advisors' recommendations on shareholder votes, stock prices and firm behavior in the context of mandatory "say on pay" votes, a novel and complex item requiring significant firm-specific analysis. Proxy advisors are more likely to issue an Against recommendation at firms with poor performance and higher levels of CEO pay, but rather than following a "one-size-fits-all" approach, they take into account firm-specific circumstances. Proxy advisors' recommendations are the key determinant of voting outcome but the sensitivity of shareholder votes to these recommendations varies with the institutional ownership structure, the rationale behind the recommendation and certain firm characteristics. We document a small but significantly negative market reaction to the release of negative recommendations. More than one third of the firms receiving a negative recommendation publicly question the proxy advisors' methodologies, but this protest has no effect on the recommendation and the voting outcome. Our findings contribute to the literature on shareholder voting and the related policy debate.