The role of retail investor attention in shaping corporate diversification strategies: Evidence from China

This study explores the role of retail investor attention in shaping corporate diversification strategies in emerging markets. Moving beyond the traditional focus on internal governance factors, we investigate how external market monitoring, driven by retail investor attention, influences diversification decisions. We utilize an innovative text-mining approach, based on Baidu Index data, to quantify retail investor attention. Based on an analysis of 17,661 firm-year observations from 2553 listed Chinese enterprises, we found that retail investor attention significantly reduces corporate diversification. The mechanisms involve information transparency improvements, governance monitoring reinforcement, and reputational discipline intensification. Moreover, this restraining effect exhibits important cross-sectional variation, being more pronounced in non-state-owned enterprises, firms with higher executive shareholding, those with stronger investor protection systems, and companies in the growth or maturity stages. Additionally, the analysis of attention dynamics reveals an asymmetric effect: corporate diversification is significantly constrained only during periods of increasing investor attention, while remaining insensitive to attention decreases. Further subsample analyses indicate that the constraining effect of retail investor attention on corporate diversification is more pronounced in firms with a higher propensity for value-destroying diversification. Importantly, this attention-driven optimization of diversification strategies leads to measurable firm valuation gains. These findings advance our understanding of how investor behavior shapes corporate strategy and offer practical insights for firms navigating diversification decisions in emerging markets.