DP15070 Do institutional investors stabilize equity markets in crisis periods? Evidence from COVID-19

Author(s): Simon Glossner, Pedro Pinto Matos, Stefano Ramelli, Alexander F Wagner
Publication Date: July 2020
Date Revised: June 2021
Keyword(s): Coronavirus, corporate cash holdings, Corporate Debt, COVID-19, ESG, fire sales, Institutional Ownership, leverage, Retail investors, tail risk
JEL(s): G01, G12, G14, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15070

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 equity portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. Data from a discount brokerage (Robinhood) confirm that retail investors provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes.