The Granular Nature of Large Institutional Investors
Charles A. Dice Center Working Paper No. 2015-09
86 Pages Posted: 20 Jun 2015 Last revised: 13 Dec 2017
Date Written: November 2017
Large institutional investors own an increasing share of equity markets. We conjecture that a financial market in which large institutions dominate operates differently than a market populated by smaller independent investors. To support this view, we show that funds within the same family display higher correlation in flows and investment strategies. As a result, large institutions are likely to impose greater liquidity demand on the stocks they trade. Accordingly, we find that ownership and trades by large institutions lead to higher volatility and to increased return and liquidity comovement. Moreover, during times of market turmoil, stocks with higher ownership by large institutions display significantly larger price drops.
Keywords: Institutional investors, Concentration, Granularity, Fire Sales, Liquidity
JEL Classification: G01, G12, G23
Suggested Citation: Suggested Citation