Institutional investor distraction and stock price synchronicity

Abstract

This article examines the relation between institutional investor distraction and stock price synchronicity using extreme industry returns as an exogenous shock to investor attention. We find that institutional investor distraction is negatively associated with the quantity of firm-specific information incorporated into stock prices. Underlying mechanisms that lead to our results are the decremental disclosure of valuable information and reduced efficiency of information dissemination. Further analyses imply that the negative impact of institutional investor distraction is more pronounced for firms with weaker internal control and lower market competition. This stock price synchronicity significantly increases financial constraints and weakens investment horizons.