Institutional Shareholder Activism and Limited Investor Attention

Abstract

We investigate whether limited investor attention is a factor in the effectiveness of institutional shareholder activism. Prior research has shown that an inability of market participants to allocate sufficient intellectual effort to the investment decision can have an impact on market price and volume behavior. We extend this research in an applied setting by considering the effectiveness of the California Public Employees’ Retirement System (CalPERS) focus list, whose aim is to improve the performance and corporate governance of target firms. We find that the share price and volume response to being included in the focus list is a function of the investor attention in a stock, which in turn has an impact on the subsequent managerial response. This suggests that when attention is a scarce cognitive resource, the proactive exploitation of news signals can be an efficient activism strategy.