Distracted Institutional Investors

Daniel Schmidt

We investigate how distraction affects the trading behavior of professional asset managers. Exploring detailed transaction-level data, we show that managers with a large fraction of portfolio stocks exhibiting an earnings announcement are significantly less likely to trade in other stocks, suggesting that these announcements absorb attention which is missing for the choice of which stocks to trade. This distraction effect is more pronounced for non-passive managers that engage in active stock selection choices. Finally, we 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.