54 Pages Posted: 17 Nov 2011 Last revised: 20 Oct 2015
Date Written: May 5, 2014
Institutional ownership affects the sensitivity of stock returns to changes in market liquidity (liquidity risk). Overall, institutional ownership lowers the liquidity risk of stocks. However, different types of institutions affect liquidity risk in opposite ways. Stocks held by hedge funds, especially levered hedge funds, as marginal investors are more sensitive to changes in market liquidity than comparable stocks held by other types of institutions or by individuals. In contrast, stocks held by banks are less sensitive to changes in aggregate liquidity. These findings are robust to alternative specifications that control for institutional preferences for different stock characteristics and risk.
Keywords: Liquidity risk, institutional investors, hedge funds
JEL Classification: G14, G23
Suggested Citation: Suggested Citation
Cao, Charles and Petrasek, Lubomir, Liquidity Risk and Institutional Ownership (May 5, 2014). Journal of Financial Markets, Forthcoming; FEDS Working Paper No. 2011-49. Available at SSRN: https://ssrn.com/abstract=1960625 or http://dx.doi.org/10.2139/ssrn.1960625
By Andrew Ang