Institutional Shareholders’ Temporary Distraction: Acute Pain or Chronic Pain? Evidence from Bank Loans

Abstract

Shareholder attention matters for a corporate. Yet little is known about how it affects corporate financing costs. This paper examines the effect of the distracted attention to a particular firm on a firm’s loan contract by adopting a distinct quasi-natural experiment that measures exogenous shocks to shareholder attention. Based on a tranche-level sample from 1985 to 2017 of US non-financial borrowers, we find there is a positive relationship between the distraction and the cost of bank loans. Distraction also increases lenders’ concerns about risks that are reflected in a loan’s contracting and participation. Further tests show that the effects of distractions are associated with institutional shareholder type. The variations of the effects are due to the changes in agency costs and signalling after each type of shareholder is distracted. Overall, this study contributes to the literature that shareholders’ temporary distracted attention is chronic pain to a firm since it hurts a firm’s access to long-term bank loan credits.

Keywords: Cost of bank loans; Institutional shareholder distraction; Institutional shareholders type; Agency cost; Information transparency; Access to credit

JEL Classification: G32, G30