Using a new measure of shareholder inattention based on exogenous industry shocks to institutional investor portfolios, we find that firms with distracted shareholders are associated with a higher cost of debt financing. This effect is stronger for firms with more powerful CEOs, firms with higher information asymmetry, and those operating in less competitive product markets. We also find that bond covenants, as a mechanism designed to reduce the agency problems inherent in lending, attenuate the increase in bond yield spreads resulting from shareholder distraction. Further testing suggests that the distraction–cost of debt relation is driven by dual holder and non-dual holders. The results are robust to controlling for inattention at the retail investor level and for other external monitors such as credit rating agencies, financial analysts, and Big 4 auditors. Overall, our evidence suggests that shareholder inattention has an incrementally negative effect on bond pricing.
Key Words: Inattention, Agency conflicts, Bond Covenants, Dual Holders, Cost of debt
JEL Classifications: G23, G34