Institutional Investor Distraction and Investment Efficiency

This paper examines the causal impact of institutional investor distraction on investment efficiency. Exploiting exogenous changes in shareholder attention following the extreme returns of unrelated industry, we find that institutional investor distraction is positively associated with investment inefficiency. This association is robust to different measures, specifications, and subsamples. We further explore two potential channels through which distracted institutional investors exert an influence on investment efficiency: monitoring effectiveness and information transparency. Moreover, we show that the distraction effect is stronger for firms with weaker governance strength and poorer information environments. Our evidence indicates that institutional investors with the superior disseminating, monitoring, and advising functions are constraint due to limited attention.