Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. By studying firm-level changes in institutional ownership, we identify two mechanisms behind this effect: A sudden withdrawal of capital from the equity market and the collective attempt to re-position equity portfolios toward more COVID-resilient stocks. The stock-price effects of ``portfolio downscaling'' trades quickly reversed in the market's recovery phase, while those of ``portfolio repositioning'' trades lingered. The institutional rush for firm resilience also caused price pressures. Retail investors acted as counterparts and provided liquidity to stocks institutional investors sold, both during the turmoil and afterward. Overall, the results indicate that when a tail risk realizes, institutional investors amplify price crashes.