The Causal Effect of Institutional Ownership on Firm Level Risk Characteristics

Farid Radmehr and Tolga Cenesizoglu

Cahiers de recherche / Working Papers from Institut sur la retraite et l'épargne / Retirement and Savings Institute

Abstract: We establish the causal effect of institutional ownership on a firm’s total risk and its systematic and idiosyncratic components using Russell 2000 index membership as an instrument for institutional ownership following (Crane, Michenaud, and Weston, 2016). We find that for a median Russell 1000 firm, a one standard deviation increase in institutional ownership in a given quarter causes a decrease in idiosyncratic volatility of 13.3% in annualized terms, which results in a decrease in total volatility of 12.8%. Institutional investors achieve this effect on a firm’s risk characteristics partially through their effect on its financial performance, as measured by unexpected earnings. More precisely, an increase in institutional ownership increases a firm’s financial performance, which turns to a decrease in its total and idiosyncratic volatility.

Keywords: Institutional investors; Risk characteristics; Russell Index (search for similar items in EconPapers)
JEL-codes: G11 G20 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cfn
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