Institutional investors’ limited attention and corporate investment efficiency: evidence from China

Using a setting of China’s A-share listed companies between 2008 and 2022, this study explores the effects of institutional investors’ limited attention on corporate investment efficiency. We rely on a firm-level measure of institutional investor distraction based on exogenous attention-grabbing shocks in unrelated parts of their portfolios and find that such distraction significantly lowers corporate investment efficiency. Possible channels include worsened information environments and exacerbated agency problems. The identified effect is stronger in firms with weaker corporate governance and less external monitoring. Moreover, institutional investors exhibit reduced information acquisition efforts when they become distracted.