Dr. Dan Zhou

University of Reading

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 institutional shareholders’ distracted attention on a firm’s loan contract by adopting a distinct quasi-natural experiment that measures exogenous shocks to shareholder attention (Kempf et al. 2017). Based on a tranche-level sample of US non-financial borrowers from 1985 to 2017, 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 decreases their participation in syndicated loans. Further tests show that the effects of distractions are associated with institutional shareholder type. The variations in the effects are due to changes in agency costs and signalling after each type of shareholder is distracted. Overall, this study’s contribution to the literature is that shareholders’ temporarily distracted attention represents chronic pain to a firm since it damages a firm’s access to long-term credit.