Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19
68 Pages Posted: 27 Jul 2020 Last revised: 12 Jul 2021
Date Written: June 28, 2021
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 equity portfolios. Most types of institutional investors re-balanced portfolios toward financially strong firms, whereas hedge funds sold stocks indiscriminately. Data from a discount brokerage (Robinhood) confirm that retail investors 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, Tail risk
JEL Classification: G01, G12, G14, G32, F14
Suggested Citation: Suggested Citation