The negative corporate governance impact of distracted shareholders: evidence from value of cash holdings

ABSTRACT

This paper examines whether distracted shareholders reduce firms’ value of cash holdings. Following prior literature, we construct a firm-year level shareholder ‘distraction’ measure, by exploiting exogenous shocks to institutional shareholders’ portfolios. We find that firms with distracted shareholders experience a decrease in the marginal value of cash holdings, which indicates that firms with distracted shareholders are more likely to misallocate company resources due to lack of monitoring. We further find that this effect is more pronounced for firms with low information asymmetry, few product market competitive threats, and high analyst coverage. The results of this paper suggest that institutional investor attention distraction will reduce firms’ monitoring intensity, which exacerbates firms’ opportunistic behaviors.

KEYWORDS:

• Distracted shareholders
• value of cash holdings
• firm value

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Social Science Project of Shaanxi Province of China [2019D046]; Ministry of Education of Humanities and Social Science Project of China [16YJA630052]; Soft Science Research Project of Shaanxi Provincial Government of China [2020KRZ006].