CBR Briefing #65

A line chart plotting acquiring companies’ cumulative market return after merger-and-acquisition announcements, with a y-axis showing percentage change in excess of the expected return and an x-axis showing a time span of six months before an announcement to thirty-six months after. One line shows a scenario of high investor distraction starting at about plus-six-percent and falling to nearly negative-ten-percent at the end. A second line shows low investor distraction, starting at about the same place, but falling only to about negative four percent.

Corporate managers misbehave when shareholders aren’t paying attention.

  • Institutional investors usually don’t have time to actively monitor all companies they invest in. When shareholders aren’t paying attention, managers tend to make investment decisions that benefit themselves but erode shareholder value, according to Chicago Booth’s Elisabeth Kempf and her co-researchers.
  • The more distracted shareholders are, the more likely managers are to announce M&A deals, particularly diversifying acquisitions, the research finds. Managers can detect that shareholders are distracted when they see signs such as decreased meeting requests, diminished news coverage, and conference calls drawing fewer critical questions.
  • Deals that managers make when investors are distracted tend to be bad for shareholders. The research finds that stock returns of bidding companies with highly distracted shareholders were about 6 percentage points lower 36 months after the deal than those of bidders with less distracted investors.

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