Distracted institutional shareholders and managerial myopia: Evidence from R&D expenses

Abstract

We explore how institutional shareholder attention affects firms’ decisions to cut R&D expenses. Prior studies consider the attention distraction of institutional investors as a signal of firms’ loosened monitoring constraints. Consistent with this view, we find that firms with distracted shareholders are more likely to engage in short-term behavior, namely, cutting R&D expenses. We further find that this effect is concentrated in firms with low information asymmetry, few product market competitive threats, few financial constraints, and low CEO ability. Our results suggest that attention is a key resource for institutional shareholders to effectively monitor firms and, hence, reduce managerial myopia.