Institutional Ownership and Tail Risk Comovement in Banks
56 Pages Posted: 16 Jul 2019 Last revised: 20 Feb 2021
Date Written: December 1, 2020
Recent regulatory discussions concentrate on the role institutional investors play in the financial sector. We investigate whether institutional ownership (IO) is related to tail risk comovement in banks. We find robust evidence suggesting that IO is positively associated with a bank’s future tail risk. We find this relationship is stronger during economic downturns at the economy-wide level, as well as for banks demonstrating greater capital needs. Correspondingly, we find that there is a greater reduction in lending during recessionary periods for banks with higher levels of IO. Our results suggest a trading mechanism through which high turnover institutions in particular play a role in increasing tail risk comovement. We find the relationship exists in both overlapping and non-overlapping ownership, and the result is concentrated when the IO base exhibits low monitoring incentives. Lastly, we find evidence suggesting that disclosure may play a role in mitigating the relationship between IO and tail risk.
Keywords: Institutional Ownership, Tail-Risk Comovement, Banks, Disclosure
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