Essays on mutual funds investment and proxy voting decisions

This dissertation consists of two essays on investments and proxy voting decisions of mutual funds. The first essay (Chapter 1) examines the influence of geographical proximity on mutual fund proxy voting decisions. Using mutual fund proxy voting data for the sample period July 1, 2003 to June 30, 2004, we find that fund managers vote more in favor of management of locally headquartered firms. Results are particularly pronounced in proposals relating to executive compensation, anti-takeover provisions, social and political issues. We show evidence that bias in proxy voting is not being driven by informational advantage; voting bias is prevalent in small as well as large size companies. Furthermore, the voting pattern suggests that geographical proximity does not facilitate better corporate monitoring as revealed by their voting decisions. Local fund managers vote more favorably for proposals that do not increase shareholders' wealth and rights. Our results suggest that familiarity and social interactions between fund managers and firm executives located in the same geographic area might explain the local bias in mutual fund proxy voting behavior.;The second essay (Chapter 2) examines whether and how the corporate governance practices of firms affect foreign investors' decisions to invest in their firms. Using a comprehensive data set of foreign equity holdings of mutual funds from 37 countries worldwide, we find that fund managers tend to tilt their portfolio weights towards firms with strong governance systems. Particularly, they invest more in foreign firms with good board characteristics and independent auditors. This result suggests that mutual funds, facing informational disadvantage in their foreign investments, prefer firms with better governance systems as a substitute for their own costly information acquisition and monitoring activities. Furthermore, firms with better governance structures attract more foreign investments irrespective of their country-level investor protection environments, suggesting that country-level governance does not substitute for firm-level governance.