Attention! Distracted Institutional Investors and Stock Price Crash
50 Pages Posted: 15 Nov 2019 Last revised: 4 Aug 2020
Date Written: November 1, 2019
Using the extreme returns of firms in unrelated industries of institutional shareholders’ portfolios as exogenous variations in institutional investor distraction (Kempf et al., 2017), we find a positive and significant relation between institutional shareholder distraction and stock price crash risk. The effect is associated with weakened monitoring, and it becomes stronger when alternative corporate governance is weaker and when managers’ incentives to hoard bad information are stronger. Managers reduce firms’ accounting conservatism when institutional investors become distracted, which is evidence of an increased motivation to hoard bad news. Overall, our findings shed additional light on the important monitoring role of institutional investors in corporate governance.
Keywords: Shareholder distraction, Crash risk, Corporate governance, Monitoring
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