Is the prayer valid for someone who, while leading the prayer, misread the word (عَالِيهِم) by pronouncing the letter ya’ with a dammah, and did not correct the mistake for fear of causing distraction?

It would have been better for you to go back and correct the mistake in the recitation. Your prayer is valid, and there is no blame on you. An unintentional melodic error (lahn) in other than Al-Fatiha does not affect the validity of the prayer.