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

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

There are 2 versions of this paper

Date Written: February 20, 2024

Abstract

During the COVID-19 stock market crash, U.S. stocks with higher institutional ownership (IO) performed worse than those with lower IO. By studying firm-level changes, we identify two mechanisms behind this effect: a sudden downscaling of institutional capital in the equity market and a collective attempt by institutions to reposition their equity portfolios toward more COVIDresilient stocks. The stock-price effects of their ‘‘portfolio downscaling’’ trades quickly reversed in the market’s recovery phase, while those of their ‘‘portfolio repositioning’’ trades lingered. The institutional rush for firm resilience also caused price pressures, with retail investors providing liquidity to stocks sold by institutional investors, both during the crisis and afterward. Overall, our results indicate that when a tail risk is realized, institutional investors amplify price crashes.

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

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

Suggested Citation: 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, Forthcoming, Management Science, Available at SSRN: https://ssrn.com/abstract=3655271 or http://dx.doi.org/10.2139/ssrn.3655271