Purpose Since the limited attention of institutional investors may have a significant impact on corporate decision-making as well as corporate governance, this paper investigates the relationship between institutional investor distraction and corporate risk-taking in order to deepen the researcher's understanding of the actual role of institutional investors. Design/methodology/approach This study uses data from listed companies in China from 2007 to 2023 to empirically examine the effect, heterogeneity and mechanism of institutional investor distraction on corporate risk-taking by constructing multiple regression models. Findings We find that institutional investor distraction significantly increases the level of corporate risk-taking, and that this relationship is more pronounced in firms with greater management power and higher ownership concentration. Further evidence suggests that the mechanism by which distracted institutional investors affect corporate risk-taking is that it reduces management's investment efficiency as well as exacerbates tunneling behavior of controlling shareholders. Additionally, we find that the impact of institutional investor distraction on corporate risk-taking is moderated by firms' internal and external governance mechanisms, the nature of corporate property rights, and institutional investor heterogeneity. Originality/value This study highlights the negative risk-taking associated with the relaxation of supervision due to the distraction of institutional investors. Therefore, regulators should also be wary of the risks associated with institutional investor distraction in the process of developing institutional investors. In addition, this study reveals the need for institutional investors to uphold the concept of supervisory governance as well as the need for firms to improve their governance mechanisms.
Chen et al. (Wed,) studied this question.