Distracted passive institutional shareholders and firm transparency

This study investigates whether distracted passive institutional shareholders influence firm transparency. To capture distraction, we exploit industry shocks that happen to partial stocks of investor portfolios and shift investor attention away from unrelated stocks. Consistent with a reduction in monitoring intensity, we find that firms with distracted passive institutional shareholders are associated with less transparent information environments, and this effect is more pronounced for firms with more concentrated passive institutional ownership. Further results show that the negative association between passive institutional shareholder distraction and firm transparency is more pronounced for firms in competitive industries and for firms with new CEOs, suggesting that the lessening of monitoring intensity leads to a greater decrease in firm transparency when managers have more incentives to make firms opaque. This study contributes to showing the consequences of investor limited attention on corporate actions and providing evidence to support the monitoring effect of passive institutional shareholders.