As China’s high-speed rail network continues to improve, capital market laws and regulations gradually improve, and the government vigorously promotes the cross-regional flow of factors, cross-regional investment in capital factors has become a new normal in the capital market. Accompanying this trend, the institutional shareholder structure of listed companies has gradually become geographically dispersed. Against this background, this paper empirically tests the relationship between the geographical dispersion of institutional shareholders and corporate innovation by manually sorting the geographical dispersion indicators of institutional shareholders. The study found that the geographical dispersion of institutional shareholders can promote corporate innovation, including the quantity and quality of innovation. Economic mechanism analysis indicates that the geographic dispersion of institutional shareholders promotes corporate innovation through three channels. Firstly, it ensures management stability by avoiding the problem of excessive supervision. Secondly, it expands financing channels and reduces information asymmetry through local social networks, thereby alleviating financing constraints. Finally, it promotes knowledge exchange and technological cooperation between different regions by utilizing diverse market and technical information, enhancing the effects of knowledge spillover. Heterogeneity analysis shows that the promoting effect of geographical dispersion of institutional shareholders on innovation is more obvious in high-tech industries and samples with higher external environment uncertainty, higher institutional shareholders’ trust in the company, and higher institutional shareholder stability. The research conclusions of this article reveal the role of cross-regional flow of capital factors in promoting high-quality economic development, and provide theoretical evidence for accelerating the construction of a national unified market.