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Managerial response to institutional investor distraction

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  • Trinh, Tri
  • Walker, Mark D.
  • Yost, Keven

Abstract

When institutional investors become distracted due to extreme returns in other portfolio firms, managers face less pressure to pursue and actively oversee risk-taking innovation that creates long-term shareholder value. We document that firms significantly reduce innovation output following increases in investor distraction, measured by both patent filings and patent citations and after controlling for firm and industry characteristics. We further show that managers respond by decreasing firm idiosyncratic risk as predicted by agency theory. However, our results examining executive compensation do not suggest that firm boards quickly alter executive compensation to adjust for changing incentives resulting from institutional distraction. Rather, executives increase their insider sale percentage.

Suggested Citation

  • Trinh, Tri & Walker, Mark D. & Yost, Keven, 2025. "Managerial response to institutional investor distraction," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:ecofin:v:76:y:2025:i:c:s1062940824002675
    DOI: 10.1016/j.najef.2024.102342
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    References listed on IDEAS

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    More about this item

    Keywords

    Innovation; Distraction; Institutional Investors; Corporate Governance; Corporate Investment;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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