Interested Intermediaries

We examine the implications of interested intermediaries on corporate actions, stock prices, and investors' portfolio decisions. An interested intermediary is an asset manager who has private preferences over corporate actions, which could relate to corporate governance policies, social or environmental performance, payout policy, etc. While large intermediaries can help solve the free-riding problem that prevents small investors from exerting beneficial influence activities, the free-rider problem persists as investors optimally choose not to delegate to the intermediary, absent frictions. We show that, due to free riding, intermediaries benefit from mechanisms that allow them to economize on costly influence efforts, such as interests aligned with managers, negative externalities across portfolio firms, and similarly-interested insiders. Our findings have implications for research and policy-making related to asset management, investor activism, and corporate social responsibility