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

During the COVID-19 stock market crash, U.S. stocks with higher institutional ownership (IO) performed worse than those with lower IO. By studying firm-level changes, we identify two mechanisms behind this effect: a sudden downscaling of institutional capital in the equity market and a collective attempt by institutions to reposition their equity portfolios toward more COVIDresilient stocks. The stock-price effects of their ‘‘portfolio downscaling’’ trades quickly reversed in the market’s recovery phase, while those of their ‘‘portfolio repositioning’’ trades lingered. The institutional rush for firm resilience also caused price pressures, with retail investors providing liquidity to stocks sold by institutional investors, both during the crisis and afterward. Overall, our results indicate that when a tail risk is realized, institutional investors amplify price crashes.