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Distracted Institutional Investors

Published online by Cambridge University Press:  08 October 2018

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Abstract

I investigate how distraction affects the trading behavior of professional asset managers. Exploring detailed transaction-level data, I show that managers with a large fraction of portfolio stocks that have an earnings announcement are significantly less likely to trade in other stocks, suggesting that these announcements divert attention from trading decisions for other stocks. This distraction effect is more pronounced for nonpassive managers who engage in active stock selection choices. Finally, I identify three channels through which distraction hurts managers’ performance: Distracted managers trade less profitably, incur slightly higher transaction costs, and are less likely to close losing positions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 6 , December 2019 , pp. 2453 - 2491
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

I thank Jennifer Conrad (the editor) and an anonymous referee for their helpful feedback. I also thank Jawad Addoum (AFA discussant), Martijn Cremers, Francesco Franzoni, Johan Hombert, Alberto Manconi, Clemens Otto, Joël Peress, Oliver Spalt (EFA discussant), Bastian Von Beschwitz, and participants at the 2016 American Finance Association (AFA) and European Finance Association (EFA) conferences. I acknowledge support by a public grant overseen by the French National Research Agency (ANR) as part of the Investissements d’Avenir program (IDEX Grant Agreement No. ANR-11-IDEX-0003-02/Labex ECODEC No. ANR-11-LABEX-0047).

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