Supervision Shadows and Information Silence: The Real Effect of Institutional Investor Distraction

ABSTRACT This study examines how distracted institutional investors affect corporate investment. Results show that institutional investor distraction reduces investment efficiency due to weakened supervision and information feedback to managers, evidenced by fewer site visits. Cross‐sectional analyses provide additional evidence that the effect of distraction is mitigated in firms with superior alternative supervision mechanisms, less reliance on information from institutional investors, and easier access to information from other sources. We also find that corporate investment activities are particularly sensitive to the distraction of pressure‐resistant institutional investors. Overall, our study demonstrates the oversight and information feedback roles of institutional investors from a limited attention perspective in emerging capital markets.