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

68 Pages Posted: 27 Jul 2020 Last revised: 12 Jul 2021

See all articles by Simon Glossner

Simon Glossner

University of Virginia - Darden School of Business

Pedro Matos

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

Stefano Ramelli

University of Zurich - Department of Banking and Finance

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: June 28, 2021

Abstract

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

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 (June 28, 2021). European Corporate Governance Institute – Finance Working Paper No. 688/2020, Swiss Finance Institute Research Paper No. 20-56, Available at SSRN: https://ssrn.com/abstract=3655271 or http://dx.doi.org/10.2139/ssrn.3655271

Simon Glossner

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
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 Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41446342953 (Phone)

HOME PAGE: http://https://sites.google.com/view/stefanoramelli/about

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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