Do institutional investors stabilize equity markets in crisis periods? Evidence from COVID-19

Simon Glossner, Pedro Pinto Matos, Stefano Ramelli and Alexander Wagner

No 15070, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. At least some retail investors (e.g., Robinhood investors) appear to have provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes.

Keywords: Corporate cash holdings; Coronavirus; Corporate debt; Covid-19; ESG; Fire sales; Institutional ownership; Leverage; Retail investors; Tail risk (search for similar items in EconPapers)
JEL-codes: G01 G12 G14 G32 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-cfn, nep-cwa and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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