Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19

70 Pages Posted: 27 Jul 2020 Last revised: 6 May 2022

See all articles by Simon Glossner

Simon Glossner

University of Virginia - Darden School of Business

Pedro Matos

University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)

Stefano Ramelli

University of Zurich - Department of Banking and Finance

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: December 8, 2021

Abstract

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. This under-performance was unrelated to revisions in earnings expectations, which suggests a disconnect between stock prices and firm fundamentals. Two mechanisms were at play: Institutions faced a sudden increase in redemptions and simultaneously attempted to de-risk their portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. At least some retail investors (e.g., Robinhood investors) appear to have provided liquidity. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes.

Keywords: Cash holdings, Coronavirus, Corporate debt, COVID-19, ESG, Fire sales, Institutional ownership, Leverage, Pandemic, Retail investors, Robinhood, Systemic risk, Tail risk

JEL Classification: G01, G12, G14, G32, F14

Suggested Citation

Glossner, Simon and Matos, Pedro and Ramelli, Stefano and Wagner, Alexander F., Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19 (December 8, 2021). Swiss Finance Institute Research Paper No. 20-56, European Corporate Governance Institute – Finance Working Paper No. 688/2020, Available at SSRN: https://ssrn.com/abstract=3655271 or http://dx.doi.org/10.2139/ssrn.3655271

Simon Glossner

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Pedro Matos

University of Virginia - Darden School of Business ( email )

University of Virginia
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434 243 8998 (Phone)
434 924 0726 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty-research/directory/pedro-matos/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Stefano Ramelli

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41446342953 (Phone)

HOME PAGE: http://https://sites.google.com/view/stefanoramelli/about

Alexander F. Wagner (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

HOME PAGE: http://www.alex-wagner.com

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