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

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

Simon Glossner, Pedro Matos, Stefano Ramelli, Alexander Wagner

Series number :

Serial Number: 
688/2020

Date posted :

July 27 2020

Last revised :

July 13 2021
SSRN Share

Keywords

  • cash holdings • 
  • Coronavirus • 
  • Corporate debt • 
  • COVID-19 • 
  • ESG • 
  • fire sales • 
  • Institutional ownership • 
  • leverage • 
  • Pandemic • 
  • retail investors • 
  • Robinhood • 
  • tail risk

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. This under-performance was unrelated to revisions in earnings expectations, which suggests a disconnect between stock prices and firm fundamentals. Two mechanisms were at play: Institutions faced a sudden increase in redemptions and simultaneously attempted to de-risk their equity portfolios.

Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. Data from a discount brokerage (Robinhood) confirm that retail investors provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes.

Authors

Real name:
Simon Glossner
Real name:
Research Member
Darden School of Business, University of Virginia
Real name:
Stefano Ramelli