DISTRACTED SHAREHOLDERS AND CORPORATE ACTIONSKEMPF, MANCONI & SPALT

AMADEUS BACH | UNIVERSITY OF MANNHEIM 12.04.2018

Research question

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WhatInvestigate manager actions in response to reduced monitoring constraints

by shareholders (distracted shareholders)

WhyLimited evidence for attention literature in behavioral finance while

significant changes in corporate actions (mainly M&A) might be triggered by

less monitoring

How

• Subset of institutional investors

• Exploit temporary attention shocks for each institutional investor

• Construct firm-level distraction measures by aggregating information

about institutional investors for each firm

• Regress distracted shareholders on corporate actions

Setting

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Firms Institutional

Investors Firm A

(treatment)

Firm B

(control)Investor 1

Firm C

(shock)Investor 2

Firm D

(control)

Distracted Shareholder Hypothesis: If institutional shareholders shift attention away from a firm, this

loosens monitoring constraints and managers have greater leeway to maximize private benefits

Distraction measurement

Dfq = Distraction measure for each firm f quarter q

Fq-1 = set of firm f ’s institutional shareholders at the end of quarter q−1

IND = Fama-French 12 industry

INDf = firms f ’s industry

W ifq-1 = how important investor i is for firm f

W iq-1 IND = how much the investor i cares about other industry

ISqIND = whether a distracting event occurs in one quarter in an industry other than INDf (dummy)

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Does D capture distraction?

(1) & (2) Less participants in analyst calls

(3) & (4) Less proposals by institutions

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Main regressions: 1. Merger

More mergers at companies with distracted shareholders. Especially diversifying mergers.

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Main regressions: 2. Merger performance

3-days around announcement:

(1) & (2) Lower abnormal returns for acquirer

(3) & (4) Lower synergies for acquirer and target

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Main regressions: 3. Exit after bad merger

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Distracted investors are less likely to exit after bad merger

High-distracted firms Low-distracted firms

Mandatory

shareholder vote for

M&A deal if bidder

needs to issue at

least 20% more

shares

Main regressions: 4. Mandatory shareholder votes

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Main results

Firms with distracted shareholders are:

1. more likely to announce diversifying, value-destroying, acquisitions

2. more likely to grant opportunistically timed CEO stock options

3. more likely to cut dividends

4. less likely to fire their CEO for bad performance

5. having abnormally low stock returns

Combined, these patterns are consistent with a model in which the unrelated shock shifts investor

attention, leading to a temporary loosening of monitoring constraints.

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Contribution

1. Implications of limited shareholder attention on corporate actions

2. New evidence suggesting limited attention not only affects retail investors but also institutional

investors

3. Evidence suggesting that monitoring by institutional shareholders affects firm value

substantially

4. Principal Agency literature: Evidence for rent seeking managers

5. Large sample evidence on resulting managerial actions for exogenous variation in monitoring

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Backup Slides

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Backup: Does D capture distraction?

Smaller changes in stockholdings of firm i in portfolio of distracted shareholders

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Backup: Main regressions: 1. Merger

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Backup: Main regressions: 2. Merger performance

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Backup: Main regressions: 5. Influence of CEO power and board strength

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In addition, forced CEO turnover interaction term with RoA: positive significant (t-value 2.17)

Backup: Other corporate actions

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