Proxy advisory firms developed due to market failures underlying voting and corporate governance more broadly. However, these firms, which have not been subject to mandatory regulation, reflect their own market failures, emphasizing challenges underlying corporate governance. We highlight underlying frictions, such as economies of scale and public goods aspects to information production, the import of incentive conflicts faced by the advisory firms, their power, and the implications of their recommendations and votes by different types of investors. Asset managers emphasizing stewardship are more supportive of management than are proxy advisors. We highlight the evolving regulatory environment and limitations of one-size-fits-all recommendations. (JEL G34, G38, G24, H4) Received October 31, 2019; editorial decision October 17, 2020 by Editor Andrew Ellul.

Financial regulators considering the desirability of a new rule or regulation sometimes use pilot studies for evidence-based decision making. Although pilot studies can generate new knowledge, they also can be expensive and subject to serious selection biases, spillover problems, and the infeasibility of a blind design. Alternatively, regulators can often evaluate a proposed regulation’s impact by analyzing archival data or applying theory based on well-accepted economic principles. We discuss why pilot studies can be useful, but also why regulators and industry participants sometimes favor pilot studies with little scientific value. We illustrate these issues by discussing various SEC pilot studies.