Attention! Distracted institutional investors and stock price crash |
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| Affiliation: | 1. Monash Business School, Monash University, Australia;2. Department of Accounting, University of Melbourne, Australia;1. Tasmanian School of Business and Economics, University of Tasmania, Australia;2. Department of Finance, Ivy College of Business, Iowa State University, United States;3. Department of Accountancy, City University of Hong Kong, Hong Kong;1. School of Management, Xi''an Jiaotong University, 28 West Xianning Road, Xi''an 710049, China;2. College of Business, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong 999077, China |
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| Abstract: | 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. |
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