Research on the Impact of Institutional Investor Distraction on Firm Transparency

機構投資者注意力分散對公司透明度的影響研究

Student thesis: Doctoral Thesis

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Author(s)

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Detail(s)

Awarding Institution
Supervisors/Advisors
  • Liandong ZHANG (Supervisor)
  • Yangxin YU (Supervisor)
  • Junrui ZHANG (External person) (Supervisor)
  • Junrui Zhang (External person) (External Supervisor)
Award date2 Dec 2020

Abstract

After decades of development, institutional investors have replaced individual investors as the main force of capital market investors. With the continuous increase in the scale of institutional investors’ shareholdings, the types of institutional investors also exhibit diversified characteristics. Given the rise of shareholder activism and the improvement of regulatory systems in various countries, some institutional investors gradually abandoned the Wall Street principle and began to actively participate in corporate governance. However, the monitoring capacity of institutional investors is limited. They are constrained by the inadequate attention of institutional investors. Institutional investors are likely to be attracted by firms in the industries where hot events occur and shift their attention away from the rest of the firms. This distraction reduces the monitoring intensity of institutional investors on management. Firm transparency is the foundation of corporate governance and investor protection. Investigating the relationship between institutional investors and firm transparency has always been an important research topic in the fields of accounting and finance. Accordingly, this article incorporates the investors’ limited attention into the analysis framework of institutional investor monitoring to explore its impact on firm transparency.

This article takes US listed companies from 2000 to 2017 as a research sample. Through a series of empirical tests, this study finds that institutional investor distraction has a negative impact on firm transparency; focusing on different types of long-term institutional investors, this study finds that the distraction of both dedicated and quasi-index institutional investors has a negative impact on firm transparency, while the impact of dedicated institutional investor distraction is larger; considering the moderating effects of managers’ disclosure incentives, this study finds that when the CEO managerial ability is higher, the relationship between institutional investor distraction and firm transparency is less pronounced; when the CEO is in the early years of his/her service or the product market competition is higher, the relationship between institutional investor distraction and firm transparency is more pronounced.

Compared with the existing literature, this study makes the following contributions:
First, this study proves the real effects of limited investor attention on firm transparency, enriches the literature on the consequences of limited investor attention, and using institutional investor distraction as a proxy of institutional investors’ monitoring intensity, expands the research on exploring the causal relationship between institutional investor monitoring and firm transparency. Existing research on limited investor attention mainly concentrates on the impacts on capital markets, such as the influences on stock prices. Few studies investigate the impact of limited investor attention on corporate activities. Besides, among investors, existing literature mainly focuses on the effect of individual investors’ limited attention and ignore that of the institutional investors. This study investigates the effect of institutional investors’ limited attention on corporate activities. Relating institutional investors’ attention on investee firms to their monitoring intensity, this study raises and proves a negative relationship between institutional investor distraction and firm transparency. Results of this study supplement the relevant evidence on the real effect of investors’, especially the institutional investors’, limited attention. In addition, the reliability of the results on the effect of institutional investor monitoring on firm transparency is challenged by the endogeneity problem of reverse causality. Recent studies exploit settings that contain exogenous variation in institutional ownerships to overcome this problem. This study exploits the industry shocks to identify institutional investor distraction and constructs an institutional investor distraction variable which is exogenous to institutional investors’ decisions. Using institutional investor distraction as a proxy for institutional investors’ monitoring intensity, the results of this study enrich the research that aims to identify the causal relationships between institutional investor monitoring and firm transparency.

Second, this study puts forward and proves a new determinant of firm transparency from the perspective of institutional investors’ cognitive bias, making up for the shortcomings that existing literature on the effects of blockholders on firm transparency mainly focuses on the effect of ownership of shareholders. Compared to focusing on shareholders’ subjectively determined factors, such as whether presenting in a firm as a shareholder and holding how many shares in a firm, that influence firm transparency, existing literature ignores the effect of shareholders’ cognitive bias led by human’s limited cognitive capacity on firm transparency. This study shows that institutional investor distraction caused by the limited cognitive capacity of institutional shareholders has a negative impact on firm transparency. Research conclusions provide a new psychology mechanism that explains firm transparency, expanding the research on the determinants of firm transparency.

Third, through distinguishing different types of institutional investors, this study for the first time reveals the preference and influence of dedicated institutional investors on firm transparency. From the perspective of influencing firm transparency, this study also provides evidence that quasi-index institutional investors participate in corporate governance activities. As long-term and concentrated held dedicated institutional investors own more private information, existing literature speculates that dedicated institutional investors would not actively engage in corporate governance activities that aim to improve firm transparency. However, there is no direct empirical evidence supporting this speculation. This study provides evidence that dedicated institutional investors prefer higher firm transparency and proves that dedicated institutional investor monitoring has a positive impact on firm transparency. Besides, because institutional investors need to invest energy and resources to participate in corporate governance activities and quasi-index institutional investors adopt passive investment strategies, have diversified holdings, and maintain a low expense ratio to gain competitive advantage, existing evidence on whether quasi-index institutional investors (i.e., passive institutional investors) engage in corporate governance activities is mixed. Using attention as a proxy for the monitoring intensity of institutional investors, this study, from the perspective of influencing firm transparency, proves that quasi-index institutional investors would participate in corporate governance activities. Research conclusions not only supplement the evidence on the effect of heterogeneous institutional investors on firm transparency, but also enrich the evidence on the governance effects of passive institutional investors. This study also has important significance for the theoretical and practical circles to understand the role of different types of institutional investors in shaping firm transparency.

Fourth, evidence on the moderating effects of managers’ disclosure incentives shows the interaction effect of institutional investor distraction and managers’ disclosure incentives on influencing firm transparency. It has significant meaning in understanding the prerequisite for and the boundary of the impact of institutional investor distraction on firm transparency. Research results suggest that institutional investors prefer more transparent information environments; the existence of the difference between the transparency level shaped by managers’ disclosure incentives and the transparency level expected by institutional investors is the prerequisite for institutional investor distraction to affect firm transparency; and the magnitude of this difference determines the boundary of the impact of institutional investor distraction on firm transparency. Conclusions of this study have great significance for research that discusses the public-information demands and the preference for firm transparency of institutional investors.