Do institutional shareholders have an unlimited capacity to monitor firms, or are they subject to attention constraints? And if they are, what are the consequences for firm governance?
Alberto Manconi, Elisabeth Kempf, and Oliver Spalt find that
When our proxy indicates a high level of distraction, fewer questions are asked during earnings conference calls. Further, we find that institutional investors are less likely to make proposals in shareholder general meetings, and they are less likely to make large changes to their portfolios. These patterns are consistent with a diversion of shareholder attention (i.e., distraction), and support our conjecture that attention is not unbounded for institutional investors.
Our main finding is that, when shareholders are distracted, managers make more value-destroying acquisitions.