Institutional Investor Distraction and Managerial Myopia

機構投資者注意力分散對企業短視行為的影響研究

Student thesis: Doctoral Thesis

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Award date7 Apr 2021

Abstract

Institutional investor is a key player for major financial markets around the world. According to an OECD’s report on the structures of ownership for world’s publicly listed companies, institutional investors constitute the largest category of ownership type for today’s listed companies, holding approximately 41% of global market capitalization. Given the dominant position of institutional investors as corporate owners, institutional investor has become a major force in monitoring management and influencing corporate affairs. Corporate governance theory suggests that institutional investor represents an important type of external governance mechanism. Therefore, how institutional investors monitor firms and restrain managerial opportunistic behaviors has become an important sub-field of institutional investor research. Early research on the corporate governance effects of institutional investors mainly focuses on institutional holdings. However, these studies are potentially subject to the reverse causality concerns, which refers to the possibility that firms with better governance environment and less managerial opportunistic behaviors are more likely to be held by institutional investors. More importantly, studies on institutional holdings implicitly assume that firms with same institutional holding level are imposed with same level of external monitoring. They cannot open the black box of the external monitoring intensity variation mechanism.

By applying investor limited attention theory, this thesis adopts a setting where the attention of institutional investor is exogenously affected, and study the mechanism and consequences of institutional monitoring intensity. Specifically, this thesis examines whether the attention of institutional investors affects their monitoring intensity, hence influence managerial myopia. According to prior literatures, I argue that distracted institutional investors reduce their monitoring intensity, which induces managerial opportunistic behaviors. Consistent with theoretical analysis, this thesis finds that managers from firms with distracted institutional investors are more likely to engage in real myopic behaviors and myopic disclosure. Moreover, managers are more likely to become myopic when long-term institutional investors are distracted, institutional investors are holding smaller portfolios, or institutional investors are extremely distracted for more than once. Further analysis shows that this effect is concentrated in firms with low information asymmetry, few product market competitive threats, low CEO ability and few CEO stock-based compensation. Finally, I show that my results remain robust after using alternative measure of distracted institutional investors and managerial myopia.

In a whole, these results suggest that institutional investor distraction is an important determinant in firms’ myopic behaviors. The evidence is consistent with my conjecture that when institutional investors are distracted, firms are more likely to engage myopic behaviors due to lack of monitoring.

    Research areas

  • Institutional Investor Distraction, Corporate Governance, Managerial Myopia