Dedicated vs Transient: Not All Institutional Attention Is Good Attention

Abstract

Surprisingly, prior research finds that the attention paid by active institutional investors to individual stocks has no real effects on disclosure and liquidity decisions by management. In contrast, after categorizing these same active institutional investors as either dedicated or transient, we find that the attention of dedicated active investors does significantly impact the firm’s information environment, market quality, and, ultimately, their cost of capital and real investment. And as would be expected, attention from dedicated institutional investors increases voluntary disclosure by managers and coverage by analysts, whereas attention from transient institutional investors does not. Finally, we also find that dedicated institutional investor attention improves stock liquidity and price efficiency, which ultimately results in a lower cost of capital and more real investment. Transient institutional investor attention worsens equity market quality but has few real effects.

Keywords: Disclosure; Investor Attention; Institutional Investors; Information Production; Analyst Coverage; Market Efficiency; Informed Trading; Liquidity; Cost of Capital; Real Investment

JEL Classification: G12 G14 G23 G24 M41 M45