Discussion paper

DP13427 The Granular Nature of Large Institutional Investors

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.


Franzoni, F, I Ben-David, R Moussawi and J Sedunov (2019), ‘DP13427 The Granular Nature of Large Institutional Investors‘, CEPR Discussion Paper No. 13427. CEPR Press, Paris & London. https://cepr.org/publications/dp13427