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Investors' Horizons and the Amplification of Market ShocksCristina CellaStockholm School of Economics; Centre for Studies in Economics and Finance (CSEF) Andrew EllulIndiana University Bloomington - Department of Finance Mariassunta GiannettiStockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) February 12, 2013 Review of Financial Studies, Forthcoming Abstract: This paper shows that during episodes of market turmoil 13F institutional investors with short trading horizons sell their stockholdings to a larger extent than 13F institutional investors with longer trading horizons. This creates price pressure for stocks mostly held by short horizon investors, which, as a consequence, experience larger price drops, and subsequent reversals, than stocks mostly held by long horizon investors. These findings, obtained after controlling for the withdrawals experienced by the investors, are not driven by other institutional investors’ and firms’ characteristics. Overall, the evidence indicates that investors with short horizons amplify the effects of market-wide negative shocks by demanding liquidity at times when other potential buyers’ capital is scarce.
Number of Pages in PDF File: 64 Keywords: fire sales, institutional investors, investor horizon, market crashes, financial crisis JEL Classification: G11, G12, G14, G18, G22 Accepted Paper SeriesDate posted: April 21, 2012 ; Last revised: February 15, 2013Suggested CitationContact Information
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