Institutional investor distraction and corporate fraud: Evidence from China

The monitoring effectiveness of institutional investors is closely related to their attention allocation. Drawing on limited attention theory, this paper investigates how institutional investor distraction affects corporate fraud using a sample of Chinese A-share listed companies from 2010 to 2023. Constructing a distraction measure based on exogenous shocks from unrelated industries, we find that institutional distraction significantly exacerbates corporate fraud. This effect operates by reducing stock price informativeness and suppressing the dissenting behavior of independent directors. Furthermore, strong internal and external governance environments negatively moderate this relationship. Heterogeneity analyses reveal that the exacerbating effect is more pronounced in non-state-owned enterprises, firms without recent M&A activities, and companies with lower managerial incentives. Additional analyses indicate that distraction aggravates information disclosure violations, operational irregularities, and managerial misconduct. Moreover, it increases fraud propensity without lowering the probability of post-fraud detection. Finally, this impact is primarily driven by the distraction of pressure-resistant institutional investors and is short-lived, tending to be adjusted promptly.