This paper studies the role of ownership concentration in determining the relationship between idiosyncratic volatility shocks and investment across firms. Using a panel of Indian manufacturing firms listed on the Bombay Stock Exchange we find investment to be much more sensitive to idiosyncratic volatility shocks in case of firms with high ownership concentration. Further investigation points towards increased tendency for overinvestment by low-ownership concentration firms when faced with higher idiosyncratic volatility as the possible reason behind smaller investment sensitivity to idiosyncratic volatility.  Institutional ownership helps in reducing this tendency for overinvestment thereby bringing investment behaviour of low ownership concentration firms closer to that predicted by the real options framework.  Presence of a large “Outsider” block holder produces a similar reduction in the tendency for overinvestment. Our results suggest that institutional ownership beyond a certain level can curb the tendency for overinvestment driven by desire of private benefit extraction and thus help protect the interests of minority shareholders.