Asset Managers as Buyers of Last Resort

Abstract

We show that mutual funds systematically overweight financial companies that are ultimate owners of their brokers. Moreover, in times of distress, funds act as buyers of last resort and increase their ownership in their brokers' companies. The results indicate that such trading activity contributes to the price stability of large financial conglomerates, which has implications for the systemic risk of the financial sector. Portfolio performance analysis suggests that funds act as buyers of last resort for brokers that provide them with privileged investment information. The relationship is strongest for brokers that have long-lasting business ties with their clients. Exogenous changes in business ties due to brokerage firm acquisitions confirm the causal nature of the relationship.

Keywords: Asset management, brokers, price support, liquidity provision, systemic risk, financial stability

JEL Classification: G01, G11, G21, G23, G24, G28