DP13427 The Granular Nature of Large Institutional Investors

Author(s):	Itzhak Ben-David, Francesco Franzoni, Rabih Moussawi, John Sedunov
Publication Date:	January 2019
Keyword(s):	Concentration, fire sales, granularity, institutional investors, liquidity
JEL(s):	G01, G12, G23
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13427

Large institutional investors own an increasing share of equity markets in the U.S. The implications of this development for financial markets are still unclear. The paper presents novel empirical evidence that ownership by large institutions predicts higher volatility and greater noise in stock prices, as well as more fragility at times of crisis. Evidence from a natural experiment suggests a causal interpretation of this effect. When studying the channel, we find that large institutional investors exhibit traits of granularity, i.e. subunits within a firm display correlated behavior, which reduces diversification of idiosyncratic shocks.