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 :

April 16 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 market crash, U.S. stocks with higher and more active institutional ownership performed worse. The effect was stronger when institutional investors experienced larger client outflows and held more financially exposed portfolios.

This relation holds even when controlling for changes in analysts’ earnings forecasts, suggesting that stocks held more by institutions exhibited a larger wedge between stock price drops and firm fundamentals. Portfolio changes through the first quarter of 2020 reveal that institutional investors prioritized corporate financial strength over ‘‘soft’’ environmental and social performance. Trading data from a large discount brokerage (Robinhood) confirm that retail investors acted as liquidity providers. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes by fire-selling and seeking shelter in ‘‘hard’’ measures of firm resilience.

Authors

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