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This study investigates the economic outcomes of the strategic deviation (SD), the fundamental and crucial question in institutional theory and strategic management. Previous studies have yielded contradictory findings. This study reconciles conflicting results by distinguishing the effects of the SD on financial and market performance, examining the mechanism of financing constraints and the boundary condition of institutional investor heterogeneity.

This research collected data from Chinese A-shares listed manufacturing firms from 2009 to 2021 from the CSMAR and Wind databases. This study conducted empirical tests using OLS models with Stata 15.

Empirical results demonstrate that the SD has different impacts on different dimensions of performance. The SD negatively impacts financial performance while positively impacts market performance. Financing constraints mediate the main effects. Moreover, transactional institutional investors positively moderate the negative effect of the SD on financial performance, whereas stable institutional investors negatively moderate the positive effect of the SD on market performance.

By systematically revealing how the SD has different effects on financial and market performance, this study reconciles the debate on the SD between institutional theorists and strategy scholars. This research makes contributions to the research stream by providing reasonable explanations for conflicting conclusions. Furthermore, by introducing the overlooked perspective of financing constraints, this research identifies crucial mediating mechanisms and highlights the double-edged effect of financing constraints, enriching our understanding of financing constraints. Finally, this study investigates the moderating effects of institutional investor heterogeneity, thereby making valuable contributions to the comprehension of boundary conditions.