Distracted institutions, information asymmetry and stock price stability

Abstract

We study the interplay between stock price stability and the information environment following periods of institutional distraction. Using a large panel dataset over the years 1982–2016, we find that the level of ownership by distracted institutions significantly explains crash risk independent of additional determinants identified in prior research. Distraction has a pronounced effect on crash risk among firms that are subject to greater information opacity. Furthermore, we identify a causal impact of institutional distraction on the quality of the information environment that persists over the year following the distraction period. This heightened information asymmetry impedes investors’ ability to process information, leading investors to overreact to bad news.

The Effect of Institutional Investor Distraction on Analyst Forecasts

“…Faced with distracted institutional investors, a firm's incentive to provide additional information also decreases, leading to a decrease in both the quantity and frequency of the firm's disclosures (Abramova et al 2020;Basu et al 2019). Flugum et al (2021) find a causal relationship between institutional distraction and firms' information asymmetry.…”

“…In this section, I examine possible situations where institutional investors' demand for thorough analyst forecasts is higher. Prior research suggests that managers will explore a loosening of their monitoring intensity due to temporarily distracted institutions to maximize their own benefit (Li et al 2021;Ni et al 2020;Flugum et al 2021;Kempf et al 2017;Garel et al 2021) and this situation would be worse for firms with inferior corporate governance. I hypothesize that the effect of II distraction on the thoroughness of analysts' forecasts is more pronounced for firms with weak corporate governance.…”

“…On the one hand, financial analysts may put more effort on stocks that have lost the attention of incumbent institutional investors because such firms need more monitoring. However, firms are more likely to take value-destroying actions when their incumbent institutional investors are distracted (Li et al 2021;Ni et al 2020;Flugum et al 2021;Kempf et al 2017;Garel et al 2021), creating a greater demand for external monitoring in the distracted period. According to prior studies, analyst-provided information is more important for investors in such a period as firms provide less information in such a period.…”

Data Asset Disclosure and Nonprofessional Investor Judgment: Evidence from Questionnaire Experiments

“…ey cannot fully understand the status of the enterprises and make reasonable assessments of the enterprises [14]. Moreover, the existence of information asymmetry leads to unfairness in the trading market [15,16] and increases the risk of investors' trading [17,18], which reduces their evaluation of the enterprises. erefore, the data asset information disclosed by the enterprises can reduce the degree of information asymmetry between nonprofessional investors and enterprises, correct investors' evaluation of enterprises, and reflect the value of enterprise data assets to market value.…”

استجابة السوق المالية لتنظيم الإفصاح غير المالي: دليل من واقع تنظيم إفصاحات حوكمة الشركات ببيئة الأعمال المصرية

“…‫م‬ ‫على‬ ‫اﻻجتماعي‬ ‫اﻹفصاح‬ ‫لتنظيم‬ ‫السابق‬ ‫اﻷثر‬ ‫أن‬ ‫إلى‬ ‫السابقة‬ ‫الدراسات‬ ‫قد‬ ‫اﻹفصاح،‬ ‫ستوى‬ ‫كحجم‬ ‫اﻹفصاحات،‬ ‫لتلك‬ ‫المقدمة‬ ‫اﻷعمال‬ ‫لمنشآت‬ ‫المؤسسية‬ ‫الخصائص‬ ‫ببعض‬ ً ‫مرتبطا‬ ‫جاء‬ ‫بها‬ ‫المطبقة‬ ‫الشركات‬ ‫حوكمة‬ ‫مبادئ‬ ‫وجودة‬ ‫اﻷعمال،‬ ‫منشآت‬ (Haji & Anifowose, 2016;Hummel & Rötzel, 2019;Yao et al, 2020;Wang et al,2021;Hamed et al, 2022) . (Manchiraju & Rajgopal, 2017;Chen, et al, 2018;Grewal, et al, 2019;Sankara, et al, 2019;Elayan, et al, (Lin, et al, 2013;Flugum, et al, 2021;Wang, 2022) . (An & Zhang, 2013;Gormley, et al, 2013;Andreou, et al, 2016;Chen, et al, 2017b;Tee, et (Rossi & Harjoto, 2020;Wang, et al, 2021;Ernstberger, et al, (Xie, et al, 2020;Flugum, et al, 2021;Hu, et al, 2022;Loureiro & Silva, 2022;Duan & Lin, 2022;Reichmann, 2022 (Chen, et al, 2018;Sankara, et al, 2019;Grewal, et al, 2019 Elayan, et al,…”