Proxy Advisory Firms and Stock Option Exchanges: The Case of Institutional Shareholder Services

This paper examines the relationship between firm performance and the recommendations provided by Institutional Shareholder Services (ISS), the largest proxy advisory firm in the United States, regarding shareholder votes in stock option exchange programs. Using a comprehensive sample of stock option exchanges announced between 2004 and 2009, we find that firms that adopt exchanges that follow the restrictive ISS policies exhibit statistically lower market reaction at the announcement of this transaction, lower operating performance, and higher executive turnover. These results are consistent with the conclusion that ISS recommendations regarding stock option exchanges are not value increasing for shareholders.