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 :

February 25 2024
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Keywords

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

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.

Authors

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