Institutional investors' limited attention and stock price informativeness in emerging markets: Evidence from China1

Institutional shareholders, who are also subject to limited attention like individual investors, tend to be distracted by extreme return shocks to unrelated industries. This paper documents that institutional investor distraction significantly impairs the price efficiency of the Chinese financial market by reducing stock price informativeness. Further analysis indicates that institutional investor distraction directly decreases the frequency of corporate visits, the activeness of trading, and the reliance on disclosed information. Overall, our study not only provides empirical evidence for the effects of institutional investors' limited attention in emerging markets such as China but also sheds additional light on the importance of financial market institutionalization to the promotion of price efficiency.