Institutional investor distraction and corporate financial flexibility: evidence from China

Purpose The role of institutional investors in capital markets and corporate governance has become increasingly prominent. However, there is a lack of research on how their behavior under limited attention influences corporate decision-making. Moreover, the existing literature has focused mainly on developed capital markets, with limited evidence from emerging economies. To address this gap, this study aims to investigate the effect of firm-level institutional investor distraction on corporate financial flexibility within the unique context of China. Design/methodology/approach Based on a sample of Chinese listed firms from 2007 to 2021, this study investigates the impact of firm-level institutional investor distraction on corporate financial flexibility, employing ordinary least squares regression as the primary empirical method. Findings The regression results indicate that firm-level institutional investor distraction significantly reduces corporate financial flexibility, and this effect remains consistent across various robustness tests. Further analysis reveals that distraction amplifies information asymmetry, reduces pricing efficiency in the capital market and increases market risk, all of which undermine financial flexibility. Additional heterogeneity tests show that the relationship differs depending on the type of institutional investor distraction and firm characteristics. Specifically, distraction by pressure-resistant institutional investors and stable institutional investors has a more significant adverse effect on financial flexibility. The impact is also more pronounced in SOEs, firms located in the eastern region and companies in the introduction and growth stages. Originality/value This study provides valuable insights into institutional investor behavior through the lens of limited attention theory, while also enriching the research on the factors influencing corporate financial flexibility. The conclusions have significant practical implications for listed companies and regulatory authorities.