Do Managers Recognize Bad News When Shareholders are Not Paying Attention?

This paper examines whether firms engage in reporting opportunism by recognizing more bad news when institutional shareholders are distracted. We use the launch of shareholder activism campaigns by institutional shareholders as an exogenous shock to shareholder attention allocation. We find that firms whose institutional investors engage in activism campaigns targeting other firms report more negative abnormal accruals, aiming to at least partially unwind prior upward earnings management or manage down outsider expectations on future firm performance. This effect is more pronounced for firms that have previously engaged more in upward earnings management, for firms with more opaque information and less effective alternative monitoring forces, and when investors are less sensitive to bad news. We further investigate other possible channels through which to slip bad news while institutional shareholders are distracted and find that firms book more write-downs during this period. Finally, we show that managers engage in more insider sales and fewer net insider purchases during the same period.