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

68 Pages Posted: 27 Jul 2020 Last revised: 22 Feb 2024

See all articles by Simon Glossner

Simon Glossner

Board of Governors of the Federal Reserve System

Pedro Matos

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

Stefano Ramelli

University of St. Gallen - School of Finance; Swiss Finance Institute

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: February 20, 2024

Abstract

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. By studying firm-level changes in institutional ownership, we identify two mechanisms behind this effect: A sudden withdrawal of capital from the equity market and the collective attempt to re-position equity portfolios toward more COVID-resilient stocks. The stock-price effects of ``portfolio downscaling'' trades quickly reversed in the market's recovery phase, while those of ``portfolio repositioning'' trades lingered. The institutional rush for firm resilience also caused price pressures. Retail investors acted as counterparts and provided liquidity to stocks institutional investors sold, both during the turmoil and afterward. Overall, the results indicate 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 (February 20, 2024). 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

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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 St. Gallen - School of Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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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