Home bias everywhere
We all know about home bias in investing, the tendency of investors to prefer domestic over foreign investments. But this familiarity bias isn’t just visible in investment portfolios. It is also detectable in shareholder voting decisions.
Xuan Li from the Norwegian School of Economics examined over 50 million shareholder votes cast around the world and checked if investors are more likely to vote with management in the case of domestic companies than foreign companies. And yes, there is indeed such a home bias. On average, investors are 0.9% more likely to vote in favour of management proposals at shareholder meetings of domestic companies than foreign companies.
This isn’t a large home bias, but it becomes significantly larger when the vote is a contentious one. To identify contentious votes, the study looked at agenda items where the recommendation of proxy voting adviser ISS contradicts the recommendation of management. The chart below shows that when ISS recommends voting against management, shareholders tend to have a bias of voting in favour of management both for foreign and domestic companies. However, in the case of domestic companies, this bias is extremely pronounced. On average, the management of domestic companies gets about a 3.8% higher vote share in favour of its proposals from domestic investors in contentious issues.
Abnormal vote share for management proposals
Source: Li (2023)
This tendency of investors to give managers of domestic companies the benefit of the doubt on contentious issues is difficult to explain, but the study can at least partially explain it.
One such explanation is potential business ties between the investor and the company. It is less likely a shareholder will vote against the management of a company if they share the same directors or do business with each other on a day-to-day basis. Furthermore, in countries with laxer governance rules and lower outsider protection, shareholders tend to vote more often with management to stay in the good graces of management. Indeed, this home bias to vote in favour of management proposals is even more pronounced than shown above in countries with lower protection for outside investors. There is also an element of information quality at play here. In countries where transparency rules for investors are lower, domestic investors are more likely to vote with management because they may have an information advantage over foreign investors, or they may want to avoid losing access to voluntary disclosures.
Be that as it may, there is a bias among investors to vote for people who are more like the investors: managers of domestic companies. And this home bias makes it harder to control the managers of firms that are more commonly held by domestic investors than foreign investors.