Where Do Institutional Investors Seek Shelter when Disaster Strikes? Evidence from COVID-19

Abstract

Institutional investors played a crucial role in the COVID-19 market crash. U.S. stocks with higher institutional ownership -- in particular, those held more by active, short-term, and domestic institutions -- performed worse. An analysis of changes in holdings through the first quarter of 2020 reveals that mutual funds, investment advisors, and pension funds favored stocks with strong financials (low debt and high cash), whereas hedge funds sold stocks indiscriminately. None of these institutional investor groups appear to have actively tilted their portfolios toward firms with better environmental and social performance. Data from a large discount brokerage (Robinhood) indicate that retail investors acted as liquidity providers. These effects did not reverse in the second quarter of 2020. Overall, the results suggest that when a tail risk realizes, institutional investors express a preference for "hard" measures of firm resilience.

Keywords: Cash holdings, Coronavirus, Corporate debt, COVID-19, ESG, Event study, Financial crisis, Institutional ownership, Leverage, Pandemic, Retail investors, Robinhood, SARS-CoV-2, Tail risk

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