Do Institutional Investors Stabilize Equity Markets in Crisis Periods? Evidence from COVID-19
70 Pages Posted: 27 Jul 2020 Last revised: 6 May 2022
Date Written: December 8, 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 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: Suggested Citation