Distracted institutions, information asymmetry and stock price stability

Ryan Flugum, Svetlana Orlova, Andrew Prevost and Li Sun

Journal of Business Finance & Accounting, 2021, vol. 48, issue 9-10, 2015-2048

Abstract: We study the interplay between stock price stability and the information environment following periods of institutional distraction. Using a large panel dataset over the years 1982–2016, we find that the level of ownership by distracted institutions significantly explains crash risk independent of additional determinants identified in prior research. Distraction has a pronounced effect on crash risk among firms that are subject to greater information opacity. Furthermore, we identify a causal impact of institutional distraction on the quality of the information environment that persists over the year following the distraction period. This heightened information asymmetry impedes investors’ ability to process information, leading investors to overreact to bad news.

Date: 2021
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