Proxy adviser’s downgrades cost companies 1% of market value

Evidence demonstrates that investors’ behaviours change when the largest proxy advisory firm downgrades public companies’ rating on governance ground.

Professor Paul M. Guest and PhD student Marco Nerino of King’s Business School at King’s College London empirically demonstrate that Institutional Shareholder Services‘ (ISS) announcement of corporate governance ratings downgrades has a large negative stock return. When ISS marks public companies down in terms of governance, investors flee according to Guest and Nerino’s event study.

“Rating downgrades by ISS are associated with negative returns of -1.14% over a 3-day announcement window”. On the other hand, upgrade announcements do not result in a significant market reaction. The two scholars worked on 18,911 rating change announcements by ISS contributing to the debate on proxy advisory firms.

In fact, there is an ongoing debate about the influence of proxy advisers. This service is one of the many provided by corporate governance analyst firms. The array of services includes data, analysis, consulting, and of course ratings and proxy recommendations. ISS wield influence over company governance choices and investor decisions, and companies are lobbying SEC for more stringent scrutiny of proxy advisers like ISS. They argue that proxy advisers has a conflict of interest because they issues governance ratings, while selling corporate governance consultancy services to public companies.

Guest and Nerino’s study demonstrates that, as information intermediary in financial markets, ISS has influence and impact beyond “proxy recommendations and subsequent voting outcomes”, i.e. outside the proxy season.

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